Despite the internal complaining, the financial sector has actually had it pretty easy under President Obama since the Great Recession/Credit Crisis. The landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act), under many guises, wasn’t harsh enough. There hasn’t been much malice directed towards Wall Street’s biggest banks or financial institutions, so for the majority of financial stocks, it’s been business as usual.
And that’s been reflected in their performance. The sector proxy – the Financial Select Sector SPDR Fund (XLF) – is up a staggering 98% in just five years.
However, the good times in the financial sector may be ending. And no, we aren’t talking about another banking crisis. In this case, the threat is coming from the upcoming presidential election.
Both Hillary Clinton and her Republican rival Donald Trump have expressed their views about Wall Street. And in the case of Donald Trump, the view was mixed. For investors in the financial sector, a Trump presidency could signal wide sweeping changes to the sector and, ultimately, craft a different set of winners and losers.
While Trump has been pretty flippant about his Wall Street and financial reform plans, one thing has been constant in his stump speeches – dismantling the Dodd-Frank Act. The reform bill was created in the aftermath of the financial crisis, and essentially forced U.S. banks to reduce their reliance on debt for funding. It also required them to create blueprints for winding down in a crisis. Dodd-Frank had plenty of other moving parts that limited the sort of activities banks and other financial institutions were allowed to undertake.
Through various speeches and interviews, Trump has vowed to dismantle the law – citing that the Act “made it impossible for bankers to function." However, he has made no official campaign plans or policies on just how he would do that.
With Trump pledging to dismantle the landmark legislation, the nation’s biggest banks could be smiling. America’s largest investment and money center banks have spent millions of dollars adjusting their operations to comply with the law, including spin offs, asset sales, and efforts to remove “too big to fail” and “systematic importance” monikers. Under Trump’s dismantling of the Dodd-Frank,that could all end. Without a real replacement plan, it could be business as usual for the largest banks in the United States.
That would certainly benefit banking giant JPMorgan Chase (JPM ). As one of the largest financial banks in the world, JPM has been under regulators crosshairs for years since the crisis, resulting in multiple probes, lawsuits and settlements. JPMorgan Chase CEO Jamie Dimon has already called the current bill “un-American” and blames it for JPM’s lower profits since its passage. Under Trump, the investment bank could flourish, as it wouldn’t have to deal with as many regulators as before.
And speaking of banks that have been given the proverbial shaft under Dodd-Frank, there’s Citigroup (C ). Until very recently, regulators continued to hound C over its capital plans and blueprints for failure. As Dodd-Frank’s so-called whipping boy, Citigroup could soar under a Trump Presidency.
The heart of the Dodd-Frank Act is to protect the average American. Under that mandate, the bill created the new Consumer Financial Protection Bureau (CFPB). The Bureau is responsible for protecting consumers from major fraud and other shifty dealings among banks, brokers, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies. In recent talks, Trump has pledged to end the CFPB and its activities.
If that holds true, consumer credit lenders such as Capital One Financial Corp. (COF ) should benefit, as it’ll be easier to provide loans and potentially charge more in fees and other revenue-generating activities. Thus, benefiting the credit card and loan specialist. Also seeing a boost from a Trump win could be Synchrony Financial (SYF ). The former GE Capital spin off is the largest issuer of store-branded credit cards, and should also see a boost in lending activity and profits.
Private Equity & Hedge Funds
Trump has been a huge outspoken opponent of the hedge fund industry. With his now famous “hedge fund guys are getting away with murder” quote, Trump has taken on the lucrative tax loophole of carried interest that many hedge funds use to skirt around and pay lower taxes. However, while taking hedge funds to the woodshed over carried interest, his plan actually helps them by reducing their taxes further. Trump’s new tax plan would create a revised tax rate of 15% for those individuals who receive income from business partnerships. While the plan is designed to help mom & pop small business owners, many hedge funds are actually structured the same way. Trump has inadvertently given the hedge fund managers a huge tax break.
That should benefit many of the largest hedge fund manager and private equity stocks out there. Blackstone Group LP (BX ), KKR & Co. L.P (KKR ) and Och-Ziff Capital Management Group LLC (OZM ) should all be able to push more income through to their shareholders and owners if Trump is elected. Which would also be huge for their dividends.
The Bottom Line
In the end, a Trump presidency could be significant for the financial sector. His main bailiwick of removing Dodd-Frank is a huge bullish catalyst for the biggest banks in America. And despite his tough pledges on hedge funds, Trump’s actual policies give them a major advantage. In the end, investors with big stakes in financials may want to root for a Trump victory.