Mr. Samuels is a life-long banker, the founder, chairman and CEO of Avenue Bank since 2006, and now Vice-Chairman of Pinnacle Financial Partners after orchestrating the sale of Avenue Bank to them in 2016. Mr. Samuels has long been active in government relations at the state and national level on behalf of the Tennessee Banking Association.The Trump Bump
According to Samuels, there are three primary reasons for what he calls The Trump Bump-the 25% increase he has observed in mid cap banks trading levels since the election. The first reason is that there is wide spread belief that the regulatory environment will be stabilized. Given banks have already invested heavily in increased compliance, their fixed cost can begin to be offset by growth driven by a higher GDP, aiding banks profitability which in turn will put more capital into the markets. In addition, capital can be invested into growth. “There is a phenomenal outlook”, comments Samuels “due to the rising interest rates. Some economists predict four 25 basis point interest hikes in the next 24 months. This should encourage investment in banks as it increases the net interest margin. As a result, the industry should receive more capital investment. We should see more M & A activity.”
The second reason for optimism according to Samuels is the expected reduction of the corporate tax rate. “Even though interest rates are predicted to be a bit higher, if there is a lower corporate tax rate there will be an increased availability of capital for long term investment.”Finally, Trump’s platform calls for investment in infrastructure which is capital spending at a high level across the nation, which Samuels says, “Puts more money in play, more people to work and fuels economic growth.”Mitigating Factors
While there is reason for optimism, there are always unknowns. Mr. Samuels pointed out there are some mitigating factors that could have an impact on the sustainability of growth. “One factor that can’t be overlooked is the international markets. The European economy, trade relations and oil situation are in flux so they can have a negative bearing,” Samuels said. He went on to point out, “The other notable fact is the pendulum has swung hard and fast and for sustainability, a more balanced approach may be better. It is possible the market is over-adjusting and that could right size in the next twelve to eighteen months.”Reasons to be Optimistic
“Comparatively speaking,” Samuels reminds us, “We are in a much better situation than we have been in almost a decade. The banking industry valuation since 2008 has been lower than it had been for the 30 years prior. There were no new de novo charters issued for new banks in the state of Tennessee (as an example) since early 2008 as investors turned elsewhere. Further, the birth of the 2,000 page Dodd Frank bill created pressure for community banks to add non-revenue generating staff which comes right off the bottom line. Combined with lower interest rate, banks have suffered a net interest margin squeeze during this period. Lower returns for the industry have made it difficult to attract capital. The real issue the last eight years has been capital access. With a tightened hand on the money, came a grim economic forecast, reduced inventories and lost jobs.”
It is not hard to see why there is a feeling of optimism in the air for business in general and banks in particular. According to Samuels, “When banks are strong, it fuels the manufacturing and service industries.”What to Watch For
There appears to be numerous reasons for optimism in the economic outlook. It boils down to a few key things. If they happen, then economic growth should be strong for the next four years. If not, be prepared to adjust.1. Better economic growth projections for the US GDP. It is influenced by Trump’s promise to put money into the country’s infrastructure and negotiate more favorable trade deals.
2. Stabilized regulation and potentially a partial repeal of Dodd Frank, will effectively lower costs for regulation which in turn increases net income which appeals to investors. As banks attract more capital, they are able to grow their balance sheet which is invested in more loans to the community.
3. Lowered corporate tax rates will encourage more investment as well. We should see more construction, higher inventories, and more jobs.