The unexpected outcome of the presidential election in November turned out well for banks. Because it caught so many institutional investors by surprise, it forced them to reposition their portfolios. And because the nation's biggest banks serve as market makers, facilitating the buying and selling of securities, it meant that they saw a boost from the elevated activity in the markets.
Listen in to the segment below of this week's episode of Industry Focus: Financials, in which The Motley Fool's Michael Douglass and contributor John Maxfield discuss fourth-quarter bank earnings.
A full transcript follows the video.
This podcast was recorded on Jan. 23, 2017.
Michael Douglass: Let's talk about bank earnings. Before we get into specific banks, let's talk about the big overall drivers. The first one, of course, trading revenue.
John Maxfield: Yeah. This was one of those quarters where a ton of stuff happened in it. But, if there was one thing in particular that impacted bank stocks, it was the presidential election. The reason the presidential election impacted bank stocks -- or, one of the principal reasons -- was because it caused trading revenues at these large universal banks, which are banks that have both commercial banking operations and investment banking operations to soar by double digits on a year-over-year basis. And the reason trading revenue soared on a year-over-year basis as a result of the election was because institutional investors had to reposition their portfolios in the wake of the election because of the unexpected outcome. Anytime you have institutional investors in the market buying and selling different types of securities because banks are market makers, i.e., the ones that are facilitating those transactions, and they earn commission on those transactions, they're going to make a lot more money. That's one of the principal reasons it was such a good quarter for these big banks.
Douglass: Right. Certainly, bank stocks moved a great deal after the election because of expectations of deregulation, and perhaps some expectations that things like trading revenue would improve, but this is where we actually get to see some of that fall through to the bottom line. It's like, trading revenue was actually boosted by quite a bit.
Maxfield: Yeah, that's a really good point, actually, Michael. If you look at the stock prices, they shot up 25% to 30%. And that was because of the expectation for reduced regulations and all these things that could happen under the new presidential administration. But if you're talking about the fundamentals of the bank, to your point, it was the trading revenues.
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