Trump 2.0 and other catalysts for bank stocks in 2025

Bank stocks sustained most of the gains made in the immediate aftermath of the Nov. 5 election, a rally sparked by former President Trump’s win and pending return to the White House with promises to cut red tape and costs.

The day after the election, the KBW Nasdaq Bank Index surged more than 10% to 134.94 points. Two weeks later, on Wednesday, it closed at 133.30, down slightly from the month’s high but still ahead 9% since Election Day. The KBW index is up more than 35% year to date.It ticked up more than 1% in morning trading Thursday.

TD Cowen analyst Jaret Seiberg said that, in addition to vows to cut taxes and bolster earnings across sectors, Trump “offers the promise of deregulation for financials,” a development that could reduce scrutiny of everything from consumer lending to mergers and acquisitions.

Eased regulatory burdens, the argument goes, would lower banks’ compliance costs and create savings that would fall to bottom lines. Reduced oversight of M&A could bring more buyers off the sidelines and accelerate dealmaking that had slowed during President Biden’s four years in office. Biden called for more intense reviews of M&A deals, and what followed were dozens of delayed closings and several mergers getting nixed altogether.

This, in turn, made buyers more discriminating — focusing on targets that were least likely to raise even minor red flags with regulators. The total number of bank sales announced fell from 202 in 2021 to 98 last year.

In addition to banks as buyers, private equity firms and investor groups also were waiting for the election’s outcome. Acquirers pursue deals to gain scale, efficiencies and new businesses to drive earnings growth.

“The end of election uncertainty means the gates have flown wide open for CEOs and PE firms to close M&A deals,” said Mitch Berlin, Ernst & Young’s Americas vice chair for strategy and transactions.

He said the perceived bullish path forward, however, is not all about the White House. In fact, M&A momentum mounted ahead of the election amid expectations for a lower interest rate environment. The number of banks announcing plans to sell this year reached 108 by the end of October — 10 more than all of last year.

The Federal Reserve this fall delivered on expectations and served up two rounds of interest rate cuts — 50 basis points in September and 25 basis points this month. Policymakers said inflation had cooled enough to consider further reductions in the coming months. The Federal Reserve boosted rates to slow borrowing and tame inflation that topped 9% in 2022. Inflation was down to 2.6% in October.

Declining rates are expected to lower borrowing costs and minimize credit quality issues.

“Additionally if lower rates prolong economic growth, it will help banks” further “improve their asset quality,” Moody’s Ratings analyst Allen Tischler said.

For a bank acquirer, a strengthening seller balance sheet simplifies the process of evaluating the target’s health.

“Dealmakers are energized by expectations of less regulation in the new administration and continued cuts in monetary policy, and we anticipate this unleashing of pent up demand to drive” increases in M&A volumes across the financial industry and several other sectors, Berlin said.

Coming off a bumpy run over the past two years, improved credit quality would also curb banks’ costs tied to loan losses. During the third quarter earnings season, bankers said they anticipated headwinds would dissipate as borrowing costs decline in 2025. Criticized loans at publicly traded U.S. banks totaled $280 billion at the close of the third quarter, up 17% from the start of the year, according to S&P Global Market intelligence.

Lower interest rates also drive down banks’ deposit costs and could, potentially, galvanize stronger loan demand after a stagnant 2024. That combination would bolster lenders’ bread-and-butter net interest income.

“Banks look to be big winners in 2025,” Hovde analysts wrote in a post-election, post-rate cut research note.

Janney Montgomery Scott analysts agreed in a November report that bullish catalysts are lining up for banks. But they cautioned improvements are bound to develop gradually. M&A deals take months to negotiate, for example, while shifts in regulatory oversight can take a year or longer to wind through the massive bureaucracies of the federal government.

At the same time, Trump presents many unknowns, including threats of tariffs that some analysts fear could spark a rebound in inflation. Rising prices would inevitably ward off additional interest rate cuts and could cast a dark cloud over what is currently a bright outlook for bank stocks.

“For the moment, investors can enjoy the ride” knowing that “higher prices are indeed possible,” the Janney analysts wrote.