Eric Compton: U.S. banks have been on a tear over the last couple of years. Many of the names we cover have had total returns for shareholders of 20% all the way up to 70% over the last two years. For an industry which has traditionally grown tangible book value in the mid- to upper-single-digit-range, with range-bound margins and returns on equity, this does not seem sustainable to us.
With tax cuts being written into law, good reasons to expect more economic growth, regulatory relief already playing out, and a normalizing interest-rate environment, the near-term outlook for regional bank performance is certainly positive. Incorporating these factors has caused our fair value estimates to increase across the board this year. The largest factors contributing to this change were the corporate tax rate dropping to 21%, this was from our previous assumption of a drop to 25%, as well as updated leverage assumptions, as we believe banks will now begin to shed the excess capital that they have built up in response to the post-crisis regulatory environment.