Large-cap banks in the US are poised for significant advantages following an anticipated surge in capital markets activity coupled with the election of Donald Trump. Morgan Stanley highlights Goldman Sachs as the primary beneficiary of this shift. Trump's recent victory over Kamala Harris heralds a return to the White House, bringing potential changes that could favor large-cap financial institutions. In addition to heightened capital market engagement, large-cap banks may also rejoice in the stability of current capital requirements, which Morgan Stanley suggests will bolster their stock repurchases.
The original Basel 3 Endgame proposal had indicated a substantial raise of nearly 19% in capital requirements. However, this has now been moderated to a 9% increase with recent proposals. The brokerage anticipates that the Federal Reserve might choose to maintain the current capital framework or apply a Basel Endgame version that does not alter existing capital rules, effectively resulting in an uptick of $86 billion in excess capital for these banks. Firms like Goldman Sachs, Citigroup, Bank of America, and Wells Fargo are expected to benefit from the expected revival in capital markets.
Morgan Stanley elaborates on the favorable economic landscape, stating, "A Republican sweep of Congress would have favorable tax implications and regulatory changes. Among them, a potential shift in bank M&A approvals to local Fed banks, rather than today's Federal Open Market Committee, facilitating more streamlined approvals." For mid-cap banks, Trump's electoral success brings a more favorable environment for mergers and acquisitions (M&A).
Morgan Stanley advocates for banks with ample capital and liquidity capable of leveraging anticipated higher loan growth in the upcoming year. They note, "We believe declining deposit funding costs will support higher multiples in the near-term, while generating loan growth will become more important as we move into the second quarter." Prosperity Bancshares is projected to exhibit the most sustainable net interest margin expansion across varying interest-rate contexts, with anticipated growth from the third quarter of 2024 to the fourth quarter of 2025. Key mid-cap advisory firms such as Evercore, Lazard, Jefferies, and Moelis appear ready to seize the opportunities spawned by the resurgence of large-cap M&A deals.
Furthermore, the results of the election indicate a bolstered likelihood for the extension of the Tax Cut & Jobs Act, providing corporations with better clarity on tax rates, crucial for deal valuations. Morgan Stanley anticipates a notable increase in M&A activity, predicting a 50% year-over-year expansion in announcements, with an optimistic bull case projecting a remarkable 78% rise.
The election outcome suggests a higher probability of achieving this bullish scenario. In terms of consumer finance firms, the favorable results imply a higher likelihood of a less stringent regulatory environment and improved tax policies, as well as the potential for enhanced consumer credit quality in the near term.
The outlook for companies affected by the Consumer Financial Protection Bureau's late-fee rule appears to be more positive, especially with the potential for this rule being rescinded under the incoming administration. Conclusively, Morgan Stanley maintains a positive stance on large- and mid-cap banks, in addition to mid-cap advisers, while adopting a neutral perspective on consumer finance-focused firms..