Since President Trump was elected, U.S. bank stocks continue to draw attention from investors. Ben Gossack, Portfolio Manager, TD Asset Management, talks to Sara D’Elia about the three considerations that could push Bank of America’s stock price higher.
Well, since the US election in November, the banks have been on a tear of about 20%. There's been a lot of talk about the banks are pricing in perfection all their catalysts. I think what's really interesting, if we look at the earnings per share expectation in 2018, they're about $2.10. And that's not that far off from what was being expected going into 2016, about $2.05.
Now, back then, the market was expecting three interest rate hikes from the Federal Reserve. But those were delayed as we went into expectations for a China hard landing. We had concerns about an oil price of $26. And we had Brexit and concerns going into the US elections.
And now you're saying things are a bit different?
Right. So if we look at the key catalysts for the banks, they're interest rate expectations, corporate tax reform, and deregulation. And so, for interest rate expectations, Bank of America's a very interest-rate-sensitive bank given its loan mix and deposit base. And so, if there were a 100-basis-point increase in the interest rate curve, then Bank of America's net interest income would increase by almost 10%. And this is pure profit that would drop the bottom line.
However, this is pretty much factored into that $2.10 expectation. The other two key catalysts are not. So, on corporate tax reform, most banks derive their revenue from within the US. So their tax base is being taxed around 35%. This estimate is assuming about a 32% to 33% effective tax rate. If that were to get dropped to that 20% target that people are talking about, that's an immediate lift of 20% to that $2.10. It becomes $2.52.
And the last catalyst is deregulation. Regulation has been one way since the financial crisis. And so we expect the pace of compliance to sort of moderate over time. And so we'll have a new head of bank supervision at the Fed in April. And that should help the banks. But it's not in the numbers. It's not something that we can easily estimate.
But what does this mean if I'm an investor? What's the takeaway?
So it definitely tells you that the lift that we've had in prices for the stocks is mainly the stocks catching up to the rest of the market after doing nothing for four years. What we can say is that interest rate expectations-- the rise that we're expecting from the Federal Reserve-- is generally factored into our estimates. But two key factors are not. And as we get more clarity about corporate tax reform and deregulation, we should see this $2.10 number move up over time.
Thanks very much, Ben.