We still don't know exactly what the incoming Trump administration will do in terms of economic policy, but if it follows through on its promise to boost economic growth through aggressive fiscal policy, then that could be very good news for banks.
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.
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A full transcript follows the video.
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This podcast was recorded on Nov. 21, 2016.
Gaby Lapera: Janet Yellen has emphasized that she thinksthey are going to raise interest rates at the next meeting.
John Maxfield:Right. You could tie these two things together.I think it's important to reiterate once again what Gaby is saying --this is all theoretical. Nobody really hasa good grasp ofwhat their precise positions are. Even if we had a better sense of what theirprecise positions are,it remains to be seen if something like a $1 trillionstimulus package is going to make its way through aRepublican-controlled Congress,given their historical aversion to big government and debt. The other piece is,it will depend on what that infrastructure spending will look like. The best way to do it,the most effective way to do it,is to do something like FDR did during the Great Depression -- just go out and build dams and bridges and roads.President Eisenhower did the same thingwhen the government financed the construction ofthe interstate highway system. But the conversation in the Trump administration --again, this all remains to be seen,what it's going to look like -- is that they'regoing to do this infrastructure projects through huge tax credits that will begiven to private companies that will,in a sense, own those infrastructure projects. So we're talking more like toll roads, as opposed to, say,improving an airport or an interstate that runs through the middle of Wyoming. Just toreiterate, this is all hypothetical. But this is the reason that bank stocks have gone up -- inanticipation of these.
Sorry,I'm kind of going on here, Gaby,but just follow me for one more second. If these things do work,and if the economy is jilted outof its current malaise, what that will do,theoretically speaking, is to spurhigher inflation. Themost recent reading on inflationwas 1.6%,that was in October. Well, the Federal Reserve islooking for a 2% inflation rate. Once we get near or to that point, or theeconomy is headed on a fast enough trajectory to that point,the Federal Reserve will then feel comfortableraising interest rates. We'vetalked about this ad nauseam on this show,because it's such an important thing for banks -- onceinterest rates go up, banks are going to makea lot more money, because again, they sell loans, andhigher interest rates correlate intohigher prices for loans.
Lapera:AndI just want to put out there, they're going to make a lot more money.Bank of America(NYSE: BAC) said that if ratesgo up by 100 basis points, they would have an extra $5.3 billion, which isbasically an extra quarter worth of revenue for them,which is crazy.Wells Fargo (NYSE: WFC)has said $2.8 billion, andCitigroup(NYSE: C)has said $2 billion for them. That's a lot of money. That's not aninsubstantial sum.
Maxfield:It's a verymaterial amount. And it's worth touching onwhy that's the case. If you have a bank like Bank of AmericaandJPMorgan Chase(NYSE: JPM), they havehundreds of billions of dollars' worth of deposits that they use to finance the loans that they make. But a lot of those deposits,they don't have to pay any interest on them, because they're just in checking accounts. So,if interest rates go up, they will just earn more money on those loans,but they won't have to pay any more for their liabilities. So it's just a great thing for banks, when rates head higher.
Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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