And no, I have not been handed the wrong envelope. Nor is this the analogous case of an unheralded #16 Seed knocking off a dominant #1 blue-blood in the NCAA basketball tournament that has become “March Madness” - shocking, but likely short-lived. As the chart below reflects, bank stock prices literally came to life after the events of November 8, fueled by expectations of tax cuts, regulatory relief, pro-growth sentiment in D.C., and a favorable interest rate environment. And while the run since the Election has been nothing shy of staggering, seemingly prevailing potential headwinds and countervailing prospective tailwinds make for an interesting environment as we sit here today.
It is expected with almost 100% certainty that we will see a rate increase at today’s Fed meeting continuing on a long hoped for path of steadily rising interest rates underscoring solid economic growth and a resultant steeper yield curve. The only uncertainty seems to be about how the Fed will talk about the rate hike—-effectively what the “language” may signal for the rest of the year. In essence, sentiment is shifting from a focus simply on the number of rate increases that may come in 2017 and 2018, to what the pace and magnitude of those expected increases may be. Recall that the Fed projected three rate increases at the start of 2015, but only raised rates once. At the beginning of 2016 the Fed anticipated four increases. Again, only at year-end did they move rates higher. Currently, the Fed and market expectations seem to be aligned in the form of three methodical rate increases in 2017. Today’s language will be dissected carefully to ascertain if that continues to be the case.
Will virtually pristine credit quality continue to exist across the industry? The most recent FDIC Quarterly Industry Report, while continuing to reflect solid earnings and strong capital levels across the sector, also signaled some early, albeit isolated, chinks in that armour as charge-offs increased and C&I portfolios modestly weakened.
Are much anticipated tax breaks coming soon, and at levels approaching market expectations in certain corners? In early February, and then again in his address to Congress on February 28, President Trump emphasized coming significant tax relief, particularly for the middle class. However, policy details were clearly lacking, and consequently the potential magnitude (effective rates dropping from 35% to 25%, or 20% or 15%) and timing (will corporate relief take precedent over individual reform, and how quickly can this all move through Washington’s at-times slowing-grinding process?) are as yet undetermined. The devil will clearly be in the details.
And to what degree will regulatory relief, if any, look like for the industry? The Trump administration recently signaled that addressing Dodd-Frank may be tabled until sometime this Summer, as higher priority items (healthcare, immigration, taxes, and infrastructure spending, etc.) take on a greater sense of urgency with regard to the President’s agenda. So was the recent meeting between the White House and community banking leadership a portent of sympathy and understanding about the challenges faced by this sector post-financial crisis, and the apparently shared desire to implement some meaningful and constructive changes —-or was it simply another politically convenient photo-op?
In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organizations forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape. Best wishes for continued success in 2017!Michigan Banking Summary March 2017