Analysts say Democrats might have trouble tightening regulation given that their margin in the Senate would be ultrathin.
Megan Varner/Getty Images
Investors seem to see a lot to like in bank stocks after Georgia’s Senate runoff votes
While the race between Democrat Jon Ossoff and incumbent Republican David Perdue remains too close to call, Democrat Raphael Warnock appears to have prevailed over Republican Kelly Loeffler. Wall Street is expecting that Ossoff will win as well, meaning that the Democrats will have control of the Senate.
That usually would be bad for banks, implying tougher regulation and higher taxes, but in Wednesday’s trading, investors looked past that. They focused instead on the greater likelihood of Congress approving a big spending package to limit the economic pain from the pandemic, as well as a steepening yield curve, meaning a larger gap between short-term and long-term interest rates.
In early trading the KBW Bank Index (ticker: BKX) gained 5.8%, outpacing the S&P 500, which was up 0.3%.
“The two key words are stimulus and steepener, which in turn can help the “3 R’s” rates, reflation, and recovery,” Mike Mayo, senior analyst at Wells Fargo Securities, wrote in a note Wednesday. Additional stimulus will help bank customers, which will in turn help banks by lowering default rates.
Increased government stimulus will boost longer-term interest rates, helping to boost banks’ net interest margins. The yield on the 10-year note has been hovering around 1%, but Mayo sees it going to 1.25% to 1.5%—still low by historical standards but an improvement from the earlier part of the pandemic.
Mayo maintained his Overweight ratings on large lenders such as JPMorgan Chase (ticker: JPM), Bank of America (BAC), Citigroup (C), U.S. Bancorp (USB), PNC Financial Services (PNC), and Truist Financial Corp oration (TFC).
Mayo acknowledged that over the longer term, banks may have to fear increased regulation under a Biden administration with a Democrat-controlled Congress. That said, he doesn’t expect there to be any sweeping changes.
It’s a view shared by others on Wall Street, given that even if Ossoff wins, Democrats would have a thin voting margin in the Senate. The chamber would be divided evenly between Democrats and Republicans, but Democrats would have more power because Vice President-elect Kamala Harris would have a tiebreaking vote.
“With Democrats apparently sweeping the Georgia runoffs, the party will have won the majority in the Senate but a 50-50 tie is hardly “control” and we remain confident in our view that gridlock will prevent sweeping legislation from passing,” Brian Gardner, chief Washington policy strategist at Stifel, wrote Wednesday.
Write to Carleton English at [email protected]
