US Banks Election Impact: Tailwinds From Softer Regulation, More M&A, and Steepening Yield Curve

We think the election of Donald Trump to the US presidency and Republican control of both the Senate and the House will bring mostly tailwinds to the US banking industry. We will adjust our valuation models as the incoming government’s policies solidify, but with a rally of over 10% for many US banks after the Nov. 5 election, we believe potential tailwinds have largely been incorporated into share prices and view the banking sector as fairly valued to slightly overvalued.

We expect less pressure from bank capital regulation, benefiting mainly the big banks. The 2023 Basel III Endgame proposal originally had about a 19% increase in capital for the biggest banks. However, Bloomberg reported in September 2024 that the revised proposal would only increase capital requirement by 9% for the US global systemically important banks. While it will take some time for the final capital regulation to come out, we think the eventual revision for bank capital regulation will end up on the lighter side. This will allow banks to grow their balance sheets more, have higher profitability, and give back more excess capital to shareholders.

The Republican Party’s more friendly stance toward mergers and acquisitions also means the banking industry can see more consolidation, benefiting the regional banks. Through acquisitions, regional banks can enter new markets, gain new product capabilities, and get more efficient through cost savings. We also think that scale will be increasingly important as technology rapidly changes.

A likely steepening yield curve should add to banks’ net interest income. The Federal Reserve is cutting rates on the short end and the 10-year US Treasury yield is picking up after the election as the market is pricing in likely higher inflation in the long term. Because banks lend long and borrow short, an upward-sloping yield curve is better for bank earnings than a flat or inverted yield curve.