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Stock Strategist Industry Reports

Bank Bill to Bring More Competition, M&A

The regulatory relief fits our previous outlook and won’t materially change our bank valuations.

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As expected, President Donald Trump signed regulatory relief for banks into law on May 24. Because the legislation needed the support of both Republicans and Democrats, a middle ground was needed, so the bill made only moderate changes to existing regulations, most notably leaving the Consumer Financial Protection Bureau alone. Overall, the benefits from regulatory relief fit well within our previous projections, and we are not making any material changes to our fair value estimates for the companies we cover.

One of the primary benefits we see of a less stringent regulatory environment will be the ability to shed excess capital and increase leverage. For the traditional banks we cover, over the next five years we project an increase in leverage of roughly 5% on average (as measured by equity/assets) and an increase in returns on equity of more than 20%, with roughly one fourth of this increase coming from the rising leverage. We do not plan to make any changes to our economic moat ratings based on the passing of this bill, as we believe that over the longer term, the economic benefits of the law will be shared and competed away to some degree, and the gains we currently project are already accounted for in our current ratings.

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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.