Royal Bank of Canada (TSE:RY) calls the United States its second home market
SmallCapPower | November 18, 2016: Donald Trump surprised global stock markets with his U.S. Presidential victory, sending some sectors lower yet others sharply higher. U.S. bank stocks, for example, have seen their share values rise since election results were known on November 9, 2016, which could also impact the stock price performances of financial institutions north of the border, such as Royal Bank of Canada (TSE:RY). Here’s why the banking sector could benefit big time under a Donald Trump Presidency.
Perhaps the most significant impact could come from Mr. Trump’s pledge to rollback the Dodd-Frank Wall Street Reform and Consumer Protection Act, a large piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. This would likely also receive support from the Republican-controlled Congress.
Higher reserve requirements under Dodd-Frank mean banks must hold a higher percentage of their assets in cash. And critics have argued that resources required in maintaining regulatory compliance could harm the competitiveness of U.S. firms in the global marketplace.
In general, a Trump Presidency should lead to higher rates of inflation, higher interest rates, and an improvement in America’s economic strength. Higher interest rates would translate into larger profit margins for banks, and greater inflation levels should lead to higher loan amounts. Even the recent market volatility as a result of the uncertainty surrounding Mr. Trump’s policies is expected to benefit banks by boosting trading revenues from fixed income, currency, and commodities.
Finally, a reduction in the overall corporate tax rate, which he has pledged will drop from 35% to 15%, would not only boost the banks’ profitability but would also spur investment from its corporate clients that would likely involve greater levels of borrowing, especially if Mr. Trump makes good on his promise of increased infrastructure spending. In fact, he is expected to offer $137 billion in tax credits to private construction companies undertaking infrastructure projects, this according to Zacks.
Canadian banks, meanwhile, have been increasing their international exposure as a result of outgrowing their home country and that has often equated to buying assets south of the border.
Take Royal Bank of Canada (TSE:RY), for example. RBC currently generates 20% of its revenue from the United States, which the Company calls its second home market. Royal considers its acquisition of City National Corporation “a powerful & scalable engine for U.S. growth,” as it expects to leverage its platform and financial strength to increase City National’s market penetration.
Ditto for The Toronto-Dominion Bank (TSE:TD). Its U.S. retail operations comprised 25% of the Bank’s net income in its most recently reported quarter (Q3), with the U.S. revenue and net interest income rising at faster pace than its comparable Canadian business.
As well, BMO Financial Group (TSE:BMO) reported that 25% of its total Adjusted Net Income in Q3 came from the U.S., which grew 22% year over year. Even Canadian Imperial Bank of Commerce (TSE:CM) jumped back into the U.S. market in a big way by spending $4.9 billion to acquire Chicago-based PrivateBancorp this year.