Bank stocks have emerged as among the biggest benefactors of the presidential election. What explains their rise? The simple answer is that revenue at banks could potentially soar under a Donald Trump presidency.
In this clip from Industry Focus: Financials, The Motley Fool's John Maxfield and Gaby Lapera discuss why Trump's proposed fiscal policies could spur profits at the nation's largest banks by increasing loan demand as well as credit and debit card interchange fees.
A full transcript follows the video.
This podcast was recorded on Nov. 21, 2016.
Gaby Lapera: The infrastructure project, in theory, could help spur loan demand, as you mentioned earlier, because interest rates are at a historic low. If it employs a lot of people, there could be a lot more people who are looking for loans, which will help banks in the long term, because they are the people who give out loans.
John Maxfield: Right. When you're thinking about it from the perspective of a bank, one of the issues they faced basically over the past eight years since the financial crisis is that, given the uncertainty and the lack of confidence in the economy, businesses have reduced the amount of investments they're making. The flip side of this, I don't know how much you follow this, but businesses have been buying back so much stock over the past few years, and the reason they're doing that is, they're taking the money that they would otherwise be making in investments, because they don't feel like they're going to get the return on those investments, and they're instead buying back stock. Well, that doesn't do anything for the economy. But if there is going to be this stimulative impact on the economy through these fiscal expenditures and these other things, that would presumably increase confidence in businesses. And increasing confidence in businesses is going to increase the possibility that they're going to invest. And when businesses invest, one of the things they need to do is borrow money. So, what that would do is increase demand for loans, and loans are the principal product that banks sell. So, if there's a higher demand for the product, banks should make more money.
The other side of this is on the consumer side. Let's say they get these things up and going. And this is a big "if" for a number of different reasons. But let's just assume that they're able to get these things up and going. That's going to increase consumer confidence. If you increase consumer confidence, what happens there? Higher consumer confidence correlates into higher consumer spending. And how do consumers spend money? They spend money with their debit and credit cards, principally. Not a lot of people operate in cash anymore. Well, banks make money from a higher velocity of consumer spending because they earn interchange income each time your debit or credit card is swiped. So, not only would you get a boost to loan demand as a result of these policies, but you would also get a boost from interchange income on the consumer side.