Banking rally not justified by the facts

No guarantee Trump’s plan to loosen regulation will work or be exported overseas
Thursday 09 Feb 2017 Author: Tom Sieber

The market is beginning to price in a more lax regulatory environment for the banking industry as US president Donald Trump sets in motion proposals to scale back rules across the Atlantic.

We think investors should resist the temptation to hitch a ride by investing in UK banks. There are few guarantees Trump’s actions will be replicated in Europe even assuming he can successfully implement them in the US.

European Central Bank chief Mario Draghi, for example, says a relaxation of the rules is ‘the last thing we need’. We also still have serious reservations about the sector’s earnings quality and the risks of mounting bad debts.

ROLLING BACK REGULATION

On 3 February the new US president signed yet another executive order to review the 2010 Dodd-Frank regulations, introduced to help prevent a repeat of the 2007/8 financial crisis.

Shares in US investment banks moved sharply higher on the news and Barclays (BARC), which has a large North American operation, gained 4% in the immediate aftermath. Its London-listed peers posted smaller gains.

UBS reckons any repeal of, or alteration to, Dodd-Frank will be tricky to achieve, ‘while carrying symbolic significance, the legislative process provides clear constraints on what can be accomplished’. It notes changes would require senate approval and ultimately support from Democrats. (TS)

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