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What Regulatory Rollback Could Mean for Financials

No Panacea for Big Banks

Morningstar Equity Analysts 14 February, 2017 | 15:53
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On Feb. 3, President Donald Trump signed orders to review the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Following is an initial look at how this could affect the financial services companies that Morningstar covers.

We see Trump’s plans as an opening salvo in an effort to ease the regulatory burden on the nation’s banks. However, efforts to repeal or replace the law in its entirety will be far more difficult, and we don’t expect significant boosts to banks’ profitability in the near future as a result of the rule review alone. According to law firm Davis Polk, only 77.5% of the rules under Dodd-Frank had been finalized by July 2016. The mandated review and any changes to these rules could be painfully slow as well. Furthermore, we don’t think the biggest banks will be first in line for regulatory relief. We are therefore not making any changes to our fair value estimates or our economic moat ratings.

In our view, the most likely positive impact of the review for bank shareholders is an eventual easing of capital return restrictions. Again, stress testing is required by the act itself, but methodologies could conceivably be changed to ease both the immediate cost burden on banks and post-stress capital requirements. As stressed capital levels are often a binding constraint in capital return planning, such actions could make it easier for banks to increase dividends and buybacks and potentially run their businesses with moderately higher leverage.

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About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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