1 Driver of Fourth-Quarter Bank Earnings

By Motley Fool StaffMarketsFool.com

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.

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A full transcript follows the video.

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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 wasone of those quarters where a ton ofstuff happened in it. But,if there was one thing in particular thatimpacted bank stocks, it was the presidential election. The reason the presidential election impacted bank stocks -- or,one of the principal reasons -- was because it causedtrading revenues at these large universal banks, which are banks that have bothcommercial banking operations and investment banking operations to soar by double digits on a year-over-year basis. And the reasontrading revenue soared on a year-over-year basisas a result of the election was becauseinstitutional investors had to reposition theirportfolios in the wake of the electionbecause of the unexpected outcome. Anytime you haveinstitutional investors in the marketbuying and selling different types of securitiesbecause banks are market makers, i.e., the ones that are facilitating thosetransactions, and they earn commission on thosetransactions, they're going to make a lot more money. That's one of the principal reasonsit was such a good quarter for these big banks.

Douglass:Right. Certainly, bank stocks moved agreat deal after the election because of expectations of deregulation,and perhaps some expectations that things like trading revenue wouldimprove, but this is where we actually get to seesome 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%. Andthat was because of the expectation forreduced regulations and all these things that could happen under the newpresidential administration. But if you're talking aboutthe fundamentals of the bank, to your point,it was the trading revenues.

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