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.
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In this clip fromIndustry 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.
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This podcast was recorded on Nov. 21, 2016.
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Gaby Lapera: Theinfrastructure 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'rethinking about it from the perspective of a bank,one of the issues they facedbasically over the past eight years since the financial crisis is that, given the uncertaintyand 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, butbusinesses have been buying back so much stockover the past few years, and the reason they're doing that is, they'retaking 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 isgoing to be this stimulative impact on the economy through thesefiscal expenditures and these other things, that wouldpresumably increase confidence in businesses. And increasing confidence in businesses is going to increase thepossibility 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 theprincipal product that banks sell. So,if there's a higher demand for the product, banks should make more money.
Theother side of this is on the consumer side. Let's say theyget these things up and going. And this is a big "if" for a number of different reasons. But let's just assumethat they're able to get these things up and going. That'sgoing to increase consumer confidence. If you increase consumer confidence,what happens there? Higher consumer confidencecorrelates into higher consumer spending. Andhow do consumers spend money? They spend money with theirdebit and credit cards, principally. Nota lot of people operate in cash anymore. Well, banks makemoney from ahigher velocity of consumer spending because they earninterchange income each time your debit or credit card is swiped. So,not only would you get a boost to loan demandas a result of these policies, but you would also get a boost from interchange income on the consumer side.
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