The Dow Jones spiked in the immediate aftermath of Donald Trump’s electoral victory in November, including stocks of the big American banks. Goldman Sachs, JPMorgan Chase, and Wells Fargo all surged higher after Trump’s win.¹

Why did the banking sector respond positively to news of a second Trump administration? Two factors: the feeling that a more relaxed regulatory stance under Trump would mean the opportunity for more investment within the sector over the next four years, and that an end to antitrust moves made by the Biden administration could lead to more mergers and acquisitions and greater profits for U.S. banks.

Bank stocks historically outperformed during Trump’s first term, and his policies could drive further gains, as analysts see his presidency as a “significant positive” for financial markets.² Banks stand ready to capitalize. Let’s examine why and see what lessons we can draw from the first Trump administration to help us understand where things might go for the U.S. banking sector under Trump 2.0.

A Return to Business-Friendly Policies

The first reason that many banks view a second Donald Trump administration as a pathway to a more favourable environment for corporate dealmaking is due to Trump’s track record of easing financial oversight and fostering business-friendly policies. Such policies over the next four years could bolster the profitability of major U.S. banks.

During his first term, the Trump administration rolled back several regulations introduced after the 2008 financial crisis, enabling larger institutions to operate with fewer constraints. A similar deregulatory agenda is widely expected upon his return to the White House.³

One key regulatory issue centres around Basel III capital requirements, which mandate that banks maintain larger buffers against potential losses. While the Biden administration has moved to enhance these measures and has suggested bumping up the current requirement for capital ratio holdings from 4.5% to 9%, analysts predict that a Trump administration might withdraw the United States from such international regulatory standards, taking some pressure off the banking sector.⁴

Some see this potential retreat from Basel III as a way to increase banks’ ability to lend and invest, creating opportunities for growth in both traditional lending and risk-based capital allocation.⁵

Additionally, industry observers note that Trump’s willingness to make leadership changes at key regulatory bodies, such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, could create a climate of reduced oversight, fostering more aggressive expansion strategies by banks.⁶

Opportunities for Mergers and Acquisitions

In addition to lighter regulations, Trump’s re-election could ease the path to an increasing number of mergers and acquisitions (M&A), particularly after a sluggish 2023, which saw IPOs and M&A activity decline 15% for the year. Goldman Sachs projects a 20% rebound in dealmaking, which could benefit many of the largest banks.⁷

The strength of U.S. equity markets, underpinned by resilient economic growth and investor optimism, has already bolstered banks’ trading revenues and dealmaking activity. An index tracking the largest U.S. commercial banks has gained 27% year-to-date, outperforming both the broader financial sector and major stock indices such as the S&P 500 and Nasdaq Composite.⁸ This upward momentum has provided a robust foundation for banks to expand their capital markets operations.

Likewise, the broader economic environment is conducive to renewed levels of M&A activity. Elevated interest rates, while posing challenges for borrowers, have supported banks’ profitability through higher net interest margins, giving them the balance sheet strength needed to fund and facilitate deals.⁹ At the same time, investment banking activity has benefited from the rebound in equity markets and improved valuations, enabling firms to capitalize on favourable conditions to pursue strategic combinations.10

However, the Biden administration’s antitrust stance has tempered some of the consolidation efforts seen in previous years. While the banking sector has largely avoided the most stringent scrutiny, should this antitrust stance unwind under Trump as many observers expect, the stage could be set for a resurgence in large-scale mergers and acquisitions, particularly among regional banks looking to bolster their competitive positions. Analysts highlight that the banking sector thrives when consolidation activity is high, with such deals generating substantial fees for advisory services and underwriting.11

So, while regulatory developments remain a variable, U.S. banks are well-positioned to benefit both from rising stock markets and any relaxation of antitrust enforcement. A more permissive regulatory environment under the incoming Trump administration, combined with strong market fundamentals, could unlock significant growth opportunities, particularly for banks with deep investment banking operations and a focus on capital markets.

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ENDNOTES

  1. Sor, J., “Bank stocks soar after Donald Trump’s election victory,” Markets Insider, November 6, 2024; https://markets.businessinsider.com/news/stocks/bank-stocks-donald-trump-victory-reelection-wall-street-outlook-regulation-2024-11
  2. Fabbro, R. “‘More free markets, less harsh oversight’: Donald Trump’s win is about to boost banks in a big way,” Quartz, November 11, 2024; https://qz.com/donald-trump-bank-stocks-regulations-deals-revenues-1851691688
  3. Hollerith, D., “Why banks are (probably) rooting for Donald Trump,” Yahoo Finance, November 4, 2024; https://finance.yahoo.com/news/why-banks-are-probably-rooting-for-donald-trump-112355643.html
  4. Fabbro, R. “‘More free markets, less harsh oversight’: Donald Trump’s win is about to boost banks in a big way,” Quartz, November 11, 2024; https://qz.com/donald-trump-bank-stocks-regulations-deals-revenues-1851691688
  5. Hollerith, D., “Why banks are (probably) rooting for Donald Trump,” Yahoo Finance, November 4, 2024; https://finance.yahoo.com/news/why-banks-are-probably-rooting-for-donald-trump-112355643.html
  6. Sor, J., “Bank stocks soar after Donald Trump’s election victory,” Markets Insider, November 6, 2024; https://markets.businessinsider.com/news/stocks/bank-stocks-donald-trump-victory-reelection-wall-street-outlook-regulation-2024-11
  7. Fabbro, R. “‘More free markets, less harsh oversight’: Donald Trump’s win is about to boost banks in a big way,” Quartz, November 11, 2024; https://qz.com/donald-trump-bank-stocks-regulations-deals-revenues-1851691688
  8. Hollerith, D., “Why banks are (probably) rooting for Donald Trump,” Yahoo Finance, November 4, 2024; https://finance.yahoo.com/news/why-banks-are-probably-rooting-for-donald-trump-112355643.html
  9. Hollerith, D., “Bank investors are now betting 2024 could be the start of another 1995,” Yahoo Finance, September 22, 2024; https://finance.yahoo.com/news/bank-investors-are-now-betting-2024-could-be-the-start-of-another-1995-171430722.html
  10. Hollerith, D., “Wall Street’s trading desks are having a great year. The election could keep that going.” Yahoo Finance, October 24, 2024; https://finance.yahoo.com/news/wall-streets-trading-desks-are-having-a-great-year-the-election-could-keep-that-going-080001141.html
  11. Smith, T.J., “Why Trump’s Victory Is Fueling a Market Frenzy,” The New York Times, November 12, 2024; https://www.nytimes.com/2024/11/12/business/trump-stock-market-tariffs.html

Source: Chat GPT illustration

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