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Bullish bank investors say Trump-era optimism rooted in reality

Kevin Dobbs is a senior reporter and columnist. The views and opinions expressed in this piece represent those of the author or his sources and not necessarily those of S&P Global Market Intelligence.

Prominent investors have said the postelection run-up in bank stocks reflects genuine exuberance about an improving operating environment, one defined by strong credit conditions and a healthy economy, as well as the anticipated benefits of a new pro-business posture in the nation's capital.

To be sure, there is unease in many areas of the political spectrum about a Donald Trump presidency, including from some veteran lawmakers in his own party. Against that backdrop, investors in January at times pulled back on bank stocks. But the SNL U.S. Bank index nonetheless remains up more than 20% since the Nov. 8 election, and confidence among many investors endures.

Trump, whose Republican administration took over the White House in January, has vowed to capitalize on a GOP-controlled Congress to ease regulations and lower corporate taxes — a pair of developments that seemed distant hopes, at best, in the months leading up to Trump's surprise win. But since that victory, investors have grown increasingly confident in tax reform and, at a minimum, a leveling off of regulations. If banks can get a bump on the tax front and begin to plan with more confidence in the future knowing that the steady upward march in regulatory costs over the past several years has halted, then they are likely to pursue growth plans confidently and earnestly, the thinking goes. And that would prove well-timed, given that credit losses remain low and that the economy entered 2017 on solid footing.

Such was the prevailing sentiment from veteran bank investors who spoke this week at Bank Director's annual Acquire or Be Acquired conference in Phoenix.

Joshua Siegel, chairman and CEO of StoneCastle Partners, said at the conference that what he focuses on most as a community bank investor is a company's financial health and its growth. He said that, from his view, there is nothing substantial that points to conditions worsening, and with most lenders enjoying solid credit quality in an environment ripe for positive turns on regulations and taxes, growth potential for many banks is strong.

"I'm quite bullish," Siegel said.

John Eggemeyer, managing principal of long-time bank investor Castle Creek Capital, echoed the same overarching positivity. He said that, for the most part, banks reflect the economies in which they do business, and most local economies are generally healthy.

He said that if interest rates rise in 2017 as anticipated, helping banks generate stronger interest income on the loans they make, then this year could be a breakout one for earnings. Significant earnings growth is the next step to keep bank investors dialed in and stocks moving forward.

The Federal Reserve boosted its benchmark rate only once in 2016, near the end of the year. But in doing so, officials indicated they could follow that move with up to three more hikes this year. If the industry sees that trend on top of the anticipated changes in Washington, Eggemeyer said, "it's going to be a really good" new era for banks.

Tom Brown, CEO of Second Curve Capital, a hedge fund that invests primarily in banks and financial services companies, also struck a mostly upbeat tone. He said community banks stand to benefit most from eased regulation and the biggest banks are well-positioned to cultivate new clients and business because of their ongoing investments in new technology.

Trump also has vowed to ramp up federal spending on infrastructure, from roads and bridges to public transportation systems. Industry veterans at the conference viewed this as more of a long shot, given that conservatives in Congress are leery of anything that could drive up deficits. But if infrastructure spending were beefed up, banks' commercial clients likely would benefit from the new work and would grow more confident in investing in their own expansions. Banks could finance such growth.

For all the anticipated positives laid out before bank management teams, investors said they come with plenty of pressure to live up to high expectations. The best executives may flourish; others could disappoint. While there are myriad proven leaders active in banking today, from the biggest banks on down, the industry as a whole is grappling with a shortage of management talent because fallout from the 2008 financial crisis drove many out of the industry and discouraged others from entering it, Eggemeyer cautioned.

Siegel nodded in agreement and said concerns about management teams living up to lofty hopes do simmer. In some cases, he said, "I see management as the barrier to their own success."