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While much of 2016 proved to be a tough slog for banks, the industry ended the year with a bang.
Broad, generalist money flew back into the bank group with swift speed in the aftermath of the U.S. presidential election. Bank stocks have ripped up close to 24% since mid-November on the belief that brighter days lie ahead.
Investors are betting that bank margins will expand, possibly by a considerable amount, in the coming year as both short-term and long-term rates are expected to move higher. The Street also expects the banking industry to receive considerable regulatory relief from the incoming Trump administration. Even if those changes are unlikely to come quickly, many investors had previously seen the group as un-investable. Now, the prospect of rate increases, easing regulations and fiscal stimulus has many investors thinking that profitability will move materially higher.
The banking industry does appear to be on the cusp of significant change. Banks likely will see funding come back into focus in 2017 and possibly in a big way depending on actions by the Federal Reserve. Credit quality will continue to be a closely watched item as well as the U.S. economy remains in one of the longest expansionary periods on record.
Before we move ahead, we highlighted some of the most noteworthy items of the year in The Snellies, the annual awards handed out by Street Talk.
Ryan Lochte Version of the Truth Award – Wells Fargo & Co.'s fake-account scandal
When I first started covering the banking industry in 2003, I quickly learned a few things: Banks make money on spread, capital is king and Wells Fargo is the gold standard in banking.
Wells Fargo lost that moniker this year when news broke that it opened millions of unauthorized accounts for customers in response to incentives and sales pressure. The scandal led to $185 million in fines and the resignation of long-time chairman and CEO John Stumpf. More fallout followed, with regulators imposing new restrictions on the bank while new customer account openings dropped sharply.
Another name synonymous with gold, U.S. Olympic swimmer Ryan Lochte, had a similar fall from grace during the 2016 Summer Olympics in Rio de Janeiro. The 12-time Olympic medalist initially told police that he and three other swimmers were robbed at gunpoint at a gas station, but no robbery had taken place. The swimmers were actually stopped by security guards that had drawn guns to keep them from leaving after vandalizing the gas station bathroom.
Lochte was suspended from the sport for 10 months and lost endorsements from several big name brands.
Wells Fargo has taken hits of its own, with its stock underperforming the bank group by 17% since the news of the fake-account scandal broke. The bank also enters 2017 fresh off another rejection of its living will submission.
Brad and Angelina Heartbreak Award – New York Community Bancorp Inc./Astoria Financial Corp.
Angelina Jolie and Brad Pitt broke many fans' hearts when announcing their divorce a few months ago. The possible merger between New York Community and Astoria Financial followed not long after that, with the two parties announcing that they would not move forward with one of the most talked about deals over the last decade.
Like Angelina Jolie and Brad Pitt, the "marriage" between New York Community and Astoria was far shorter than the courtship. Jolie and Pitt were together for 12 years but were only married for two. Rumors of a New York Community and Astoria tie-up have circulated for more than 10 years and the two Long Island-based thrifts finally agreed to tie the knot in late October 2015. A little over a year later, they agreed to part ways.
The breakup represents one of the largest bank or thrift deal terminations ever and came as a great shock to many in the investment community.
Now the future is unclear for both parties. Keefe Bruyette & Woods analyst Collyn Gilbert expects New York Community to eventually hunt for another acquisition once it receives greater regulatory clarity later in 2017. The analyst believes that Astoria will need to reinvest in its business to remain independent but ultimately thinks that finding another partner is the most likely route for the company. Ranking in order from most likely to least likely, the analyst named Toronto-Dominion Bank, Investors Bancorp Inc., People's United Financial Inc. and BankUnited Inc. as possible acquirers of Astoria.
"Stranger Things" Award – Long-term interest rates
Like the breakout Netflix hit, "Stranger Things," the move in long-term rates since the U.S. presidential election stands out as one of the more unexpected and thrilling storylines of 2016.
During the summer, the Street seemed all but certain that interest rates were going to remain lower for longer. Around that time, "Stranger Things" premiered and offered viewers a mix of a tribute to Steven Spielberg and other classic films from the 1980s, coupled with a creepy, supernatural thriller involving top-secret government experiments.
Unprecedented changes at the highest levels of government have played a significant role in putting the lower-for-longer narrative to rest. Since the surprise victory of outsider Donald Trump in the presidential election, long-term rates have moved significantly higher. The market has responded to Trump's plans to spend $1 trillion on infrastructure while cutting taxes. A number of observers believe the moves could increase the deficit while others expect the policies to produce higher economic growth.
While the 10-year Treasury yield has declined modestly from the recent high of 2.60%, the benchmark yield still stands more than 100 basis points above the lows witnessed in the summer.
"Stranger Things" surprised many viewers, and a move up in rates likely caught investors and institutions alike off guard. In just one example, BOK Financial Corp. recently announced a $54.0 million loss on a mortgage servicing right hedge position due to the sharp move in long-term rates.
Bank observers will get to see how the quick swings in rates impacted other institutions during the fourth-quarter earnings season, which is set to kick off in just a few weeks.
Simone Biles "Big Things in Small Packages" Award – Fintech Partnerships
Simone Biles, the 4'8" U.S. gymnast, brought home four gold medals at the 2016 Summer Olympics in Rio de Janeiro. Partnerships with the financial technology industry, while small and in their early stages, have made big waves in the industry.
A number of digital lenders have partnered with banks, ditching their initial efforts to disrupt the banking industry.
Larger banks were some of the first to join hands with fintech companies, hoping to offer their customers increased speed through a user-friendly online product. But many other smaller banks have followed suit, while some institutions such as Cross River Bank carved out a niche focused on bringing regulatory compliance to the fintech industry. In serving as an issuing bank, Cross River has produced a return on average equity in excess of 20%, or nearly double the median at banks below $1 billion in assets.
Some advisers have encouraged more depositories, including community banks, to utilize the superior technology and product platforms offered by fintech companies to more effectively compete and possibly even capture business that normally goes to only the nation's largest institutions.
More bank partnerships are expected to come even after the OCC unveiled the framework for its much-discussed fintech charter. The funding advantage that banks have still make partnerships seem attractive, particularly in the face of regulatory uncertainty.