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Regulatory relief's impact on bank stocks

The expectation that Congress would approve revisions to the Dodd-Frank Act has helped fuel a steady rise in bank stocks since last fall.

Now that the Economic Growth, Regulatory Relief and Consumer Protection Act, introduced in November by Sen. Mike Crapo, R-Idaho, has become a reality, there is good reason to believe that the run-up in bank stock prices will continue, analysts at Sandler O’Neill said in a research note to investors last week.

“Hoping for passage is one thing, but seeing it through is another,” analysts Scott Siefers and Brendan Nosal wrote. “Consequently, we would not be surprised to see another pop up in the group’s share prices as the market digests the bill’s actual passage.”

There are headwinds, to be sure. Recent corporate tax cuts, while great for banks’ bottom lines, have yet to boost loan demand as bankers had been predicting, and if that trend holds for another quarter or two, bank stocks could suffer.

Markets have also been rattled of late by the Trump administration’s plans to impose tariffs on a wide array of imported goods. Indeed, bank stocks were down across the board on Tuesday as fears of a trade war with China, combined with the deepening political crisis in Italy, spooked investors.

Still, the regulatory relief package signed into law by President Trump last week is a huge win for the banking industry and regional and community banks in particular. What follows is a look at how groups of bank stocks have performed since the Crapo bill was first unveiled and how these groups will benefit — or not — from regulatory relief.
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Limited benefit for big banks, but help is on the way

The largest banks — those with assets of $250 billion or more — were never going to be the main beneficiaries of regulatory reform efforts in Congress, yet their stock prices still rose by double digits between Nov. 16 and May 22, when the Crapo bill passed the House.

No doubt, this is in part due to the passage of a new tax law in December that reduced the corporate tax rate from 35% to 21% — savings that many banks will pass on to shareholders through higher dividend payouts or increased share buybacks.

But banks seem poised to gain some relief of their own, primarily through modifications to the Volcker Rule that would relax restrictions on proprietary trading put in place after the Dodd-Frank Act was enacted. Regulators have also been loosening capital requirements for the nation’s largest banks.

Since mid-November, the median stock price for the 13 institutions in this asset class has increased 11%. That outperformed the 5.5% rise in the S&P 500 index during the same period, though it slightly lagged the 15.3% increase in the Nasdaq Bank Index, which tracks banks from all asset classes.

Bank of America has been the best performer over that span, followed by JPMorgan Chase and PNC Financial Services Group.
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A good time to be a large regional

Any bank in the $50 billion to $250 billion asset range will be exempted from the Comprehensive Capital Analysis and Review, the most onerous stress test. The number of banks subject to the CCAR test will drop from 38 currently to about a dozen.

However, patience will be required as banks with more than $100 billion of assets will be subjected to at least one more round of CCAR stress testing before they are exempted for good.

The banks in this group include some of the nation’s largest regionals, including BB&T in Winston-Salem, N.C.; SunTrust Banks in Atlanta; Citizens Financial Group in Providence, R.I.; and Fifth Third Bancorp in Cincinnati. This asset class also includes the online-only Ally Financial and the credit card banks American Express and Discover Financial Services.

Though it will be 18 months before these banks begin to realize the savings from their CCAR exemption, investors are bullish on their potential long term. The 12 banks in this group whose shares are traded on U.S. exchanges saw a median stock gain of 17% between mid-November and May 22. The best performer of the group was Regions Financial, followed by SunTrust and Discover.
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A sign stands above a Zions Bank branch in Orem, Utah, U.S., on Monday, April 19, 2010. Zions Bancorporation, the best-performing stock in the Standard & Poor's 500 this year, reported a smaller loss as loan write-offs declined for the third straight period and profit margins expanded. Photographer: George Frey/Bloomberg

CIT, BBVA, Zions and Comerica: ‘Out of the doghouse’

The small group of banks in the $50 billion-to-$100 billion asset range arguably has the most to gain from regulatory relief.

Most notably, while larger regionals must undergo one more Fed stress test, these banks — BBVA Compass in Birmingham, Ala.; CIT Group in New York; Comerica in Dallas; and Zions Bancorp. in Salt Lake City — will be immediately exempted from the CCAR process.

The banks have not put a dollar amount on how much this will reduce compliance costs, but it’s fair to say that savings will be significant, said Oliver Ireland, a banking attorney at Morrison & Foerster.

The banks in this group are “out of the doghouse,” Ireland said. “This is potentially a big help for them.”

Perhaps not surprisingly, these banks’ stocks have performed exceptionally well in the run-up to passage of regulatory reform.

Even after Tuesday’s sell-off, Zions’ shares were up 20% since mid-November, Comerica’s were up 20% and CIT’s were up 8%. (BBVA Compass is a unit of the Spanish banking giant BBVA, and its shares are not traded on U.S. exchanges.)
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Opportunities abound for small regionals?

Banks with assets of $25 billion to $50 billion have had a big burden removed as crossing the $50 billion threshold is no longer the threat it once was.

Previously, the $50 billion asset mark triggered additional layers of regulatory costs and capital restraints associated with the CCAR stress test. The removal of that trigger could allow these banks to more aggressively pursue growth strategies.

“For these banks, it is as if the high hurdle of what happens when they reach $50 billion (meaning costs and capital flexibility) could largely go away,” Sandler O'Neill analysts said in a research note. “As such, both organic and acquisition-related growth optionality could be greatly increased.”

The banks in this asset class will have more firepower to boost lending or find acquisition targets because their costs will be lower.

The $49.6 billion-asset New York Community Bancorp, led by Chairman and CEO Joseph Ficalora, above, has previously said that it has spent about $180 million to prepare for crossing the $50 billion asset threshold and incurring the new regulatory requirements. With that barrier removed, “it is undoubtedly a positive development,” Mark Fitzgibbon, an analyst at Sandler O’Neill, wrote in a May 23 research note.

New York Community has not provided specific guidance on its estimated expense savings from regulatory reform.

The $44 billion-asset People’s United Financial in Bridgeport, Conn., may also be prompted to restart its dormant M&A strategies.

“People’s United has historically been an acquisitive company,” Fitzgibbon said. “With the $50 billion threshold being raised, we expect the company to be unrestricted on the acquisition trail.”

As regulatory reform has also diminished regulatory concerns about how much capital can be returned to shareholders, banks may now be more aggressive in paying dividends and pursuing stock buybacks, Fitzgibbon said. Those should help boost these banks’ stocks in coming months.

For banks with between $25 billion and $50 billion in assets, the median stock price increased 15.6% between Nov. 16 and May 22.

Several banks in this group have significantly outperformed the 15.3% increase in the Nasdaq Bank Index since mid-November. Popular in Puerto Rico has climbed 41% in this time frame and BankUnited shares have increased 31.1%.
Rebeca Romero Rainey, chairman and CEO of Centinel Bank

Big benefits for small banks

Regulatory reform may have one group that’s the biggest winner — community banks, which are poised to see much lower regulatory costs.

“This hard-fought, long-awaited community bank regulatory relief legislation will put community banks in an enhanced position to foster local economic growth and prosperity,” said Independent Community Bankers of America President Rebeca Romero Rainey, above.

For one, these smaller banks will face less legal liability for the mortgages that they originate and hold on their books. Community bankers had long sought the ability to have the mortgages they originate receive qualified mortgage status. Many community banks had exited the business of residential mortgage lending due to the heightened regulatory requirements.

Community banks will also get a simpler capital regime under the new law. Regulators will create a leverage ratio for community banks, using tangible equity to average assets, of between 8% and 10%. Community banks will be able to avoid the costlier capital requirements of the Basel III regime.

Banks with less than $10 billion in assets will also be exempted from the Volcker Rule, which bans proprietary trading by commercial banks and limits investments in hedge funds and equity funds.

The downside for smaller banks, if there is one, is that they may have even less incentive to cross the $10 billion-asset mark.

The changes will “add yet another consideration for those banks thinking strategically of the implication of crossing $10 billion in assets,” Sandler O'Neill's Siefers wrote in a research note.

Nonetheless, investors are becoming increasingly bullish on bank stocks. The American Bankers Association’s Community Bank Index, which is made up mostly of banks with less than $10 billion of assets, is up by roughly 10% since mid-November.
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