Donald Trump won the Presidency on a business friendly platform that's anti-regulation, anti-tax, and pro-spending. His recipe for growth could spark significant upside for banks, which have been hamstrung by regulations since the Great Recession. If Trump can usher his plan through Republicans in Congress, now could be the perfect time to buy domestic banks, including KeyCorp (KEY -2.29%), Associated Banc-Corp (ASB -1.97%), and SunTrust Banks (STI).
Rust belt recovery
KeyCorp operates 1,200 branches in 15 states, including locations throughout Ohio and Michigan that could benefit from rising loan growth stemming from Trump's plans to boost U.S. manufacturing and infrastructure spending.
KeyCorp is already one of America's top banks, with $136 billion in assets, and it makes its money via community and commercial bank operations. In the third quarter, Community bank revenue was $779 million and commercial bank revenue was $553 million.
Loan demand in KeyCorp's markets is already boosting the bank's financials. Average loans ticked up 5.1% year over year in the third quarter, and KeyCorp's acquisition of First Niagara added another $23 billion in loans to the mix. Financing costs associated with loan growth were helped by 8.7% year-over-year growth in low-cost deposits.
Despite headwinds to profit from a relatively flat bond yield curve up until now, Keycorp's net interest margin remained relatively stable at 2.85% in the quarter. A year ago, the bank's net interest margin was 2.87%.
The bank's loan quality also remains favorable. Net loan charge-offs to average loans improved to 0.23% in Q3 versus 0.27% last year, and non-performing loans represent 0.85% of period end loans. While that's higher than 0.67% last year, it's down from 1% in Q2. After all the puts and takes, KeyCorp's adjusted net income was $0.30 last quarter, up from $0.27 a year ago.
Since 21% of Keycorp's deposits, 17% of its home equity loans, and 18% of its commercial loans are tied to customers in Ohio and Michigan, and management estimates that net interest income will get a 1.96% tailwind if interest rates increase by 2%, rising loan activity and increasing rates under Trump could make adding this bank to portfolios smart.
If you're looking for even more exposure to the Midwest states, you might also want to consider Associated Banc-Corp, a Green Bay based banker with 200 locations serving Wisconsin, Illinois, and Minnesota.
Associated Banc-Corp's loan portfolio finished the third quarter at $20.1 billion, up 9% year over year. Commercial loans increased 10% in the period as commercial real estate loans surged 14% higher to $4.9 billion.
Associated Banc-Corp's charge off rate increased from 0.16% to 0.38% over the past year, but that's because of exposure to energy companies that are struggling due to falling oil and gas prices. Trump's domestic energy policy could firm that sector up, removing the overhang, but even if that doesn't happen, the bank's charge-off rate is relatively small. For comparison, the average charge off rate nationally was 0.44% in Q2.
All in, the bank's net interest margin of 2.77% was down five basis points from last year, but higher loan volume allowed Associated Banc-Corp to deliver net income of $0.34 per share in Q3, up 10% from a year ago.
Assuming Associated Banc-Corp manages its oil and gas exposure prudently, an acceleration in economic activity in the Midwest could make this bank a nice addition to portfolios. Especially, if Trump follows through on his plans to cut business taxes to 15%. Last quarter, Associated Banc-Corp's effective tax rate was 31%.
Profit tailwinds from a steepening yield curve and increased economic activity won't just help the rust belt, it will also help banks serving highly populated states like Florida.
That would be good news for SunTrust, because it's a major player in Florida, the nation's fourth largest state. SunTrust is also heavily exposed to Georgia and Virginia, and overall, its loan portfolio includes $77 billion in commercial loans, $39 billion in residential loans, and $25 billion in consumer loans, across 15 states.
SunTrust's net income was $457 million last quarter and its adjusted EPS was $0.91, up 2% from last year. Income growth came courtesy of an 8% increase in revenue to $2.2 billion. And revenue through the first nine months of the year was $6.6 billion, up 7% from the comparable period in 2015.
SunTrust's net interest margin increased two basis points to 2.96% in the quarter versus a year ago and average loan balances improved 7% compared to the third quarter of 2015. Average consumer and commercial deposits grew 7% in the past year.
The bank's net charge-offs represent 0.35% of average loans, and while that's up from a year ago, it's also due largely to struggling oil and gas companies. Investors should keep an eye on that, but SunTrust's outstanding loans to the energy industry represent just 2% of its total loans, and only 14% and 21% of those loans, respectively, are to risky oil field services and exploration and development companies.
SunTrust's management estimates that the net benefit from 2% worth of rate increases is 3.6%, and if rates increase 1% then it will provide a 2.1% tailwind. Further, SunTrust's bottom line could expand substantially because of Trump's tax policy given that SunTrust's current effective tax rate is 31%. Since SunTrust is one of the south's biggest banks, this bank's stock is one of my favorites.