The Boom in Bank Stocks Is Real

Bank stocks are on a burner.

Citigroup (NYSE: C) and JPMorgan (NYSE: JPM) are up 22% YTD, while Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) are up 9.5% and 12%, respectively.

Their European counterparts have put on a show, as well.

The Stoxx 600 Banks Index rose 29% in the first six months, staging its best first-half performance since 1997.

There are a couple reasons for this.

First, lower interest rates figure to spur lending, creating more opportunities for banks to profit.

But secondly, and maybe more importantly, the Trump administration has created a far more favorable environment for banks by nixing regulations, curtailing oversight, and easing capital requirements.

What’s Driving Bank Stocks Higher?

Upon taking office the administration immediately neutered the Consumer Financial Protection Bureau (CFPB), curtailing its oversight, reining in its rulemaking, and doing away with previous edicts.

For example, Trump immediately overturned one of the bureau’s latest rules, which capped overdraft fees at $5.

He also signed a resolution overturning another late Biden-era CFPB rule that would have let examiners determine whether digital payment providers complied with the Electronic Fund Transfer Act and other consumer protection laws.

And finally, the Trump mega-bill that Congress spent months working to pass would cut the funding the CFPB has access to nearly in half by putting a new, lower cap on the amount of money the agency can get from the Federal Reserve

The Federal Deposit Insurance Corporation (FDIC) and the Federal Trade Commission (FTC) are being defanged, as well.

Then there’s Treasury Secretary Scott Bessent who’s taking an aggressive approach to regulation — not by cracking down on banking practices but by cracking down on the regulators.

Bessent says the Treasury Department intends to “drive a change in the culture of supervision” by monitoring examiners’ compliance with its procedures — i.e., regulating the regulators — and making it easier for financial firms to appeal supervisory findings.  

A former hedge fund manager himself, Bessent has also been hosting private meetings with government and industry insiders to discuss ways to further relax regulations and oversight.

Those discussions are likely to result in changes to rules on capital requirements, liquidity, and consumer lending.

For example, the stress tests routinely carried out since the 2008 financial crisis could be watered down.

Meanwhile, in Europe, Banco Santander has surged 71% YTD, and both Commerzbank and Société Générale are up about 80%.

Those gains have been driven largely by improving balance sheets and M&A activity.

That M&A momentum could easily spread, as well.

Which is to say the combination of cash, low interest rates, liquidity, and lax regulation could lead to some aggressive acquisitions among U.S. banks.

Barring that, bank stock shareholders are likely to benefit from higher dividend payouts and share repurchase programs as banks find other ways to put their newfound cash to work.

In any case, banks have been given the green light to expand their lending and their businesses.

They’re operating in an environment with fewer rules and less oversight.

And they’re likely to become more profitable even if the economy slows.