That's a Mighty Big Hiccup: Why Banks Are Sinking -- Barron's Blog DOW JONES & COMPANY, INC. 1:15 PM ET 11/8/2017 Symbol Last Price Change XLF 26.28down -0.1 (-0.38%) KBE 44.19up -0.3 (-0.67%) BAC 26.769up -0.411 (-1.51%) WFC 54.47up -0.58 (-1.05%) JPM 97.779up -0.971 (-0.98%) QUOTES AS OF 01:41:39 PM ET 11/08/2017 The overall market isn't doing great today--the SPDR S&P 500 ETF ( SPY) is little changed at $258.59 at 12:04 p.m.-- but banks and financials are getting hit as investors fret about the future of tax reform, and a narrowing yield curve.
The Financial Select Sector SPDR ETF(XLF) has declined 0.5% to $26.24, while the SPDR S&P Bank ETF(KBE) has fallen 0.9% to $44.10, as Bank of America(BAC) has slumped 1.8% to $26.28, Wells Fargo(WFC) has dropped 1,4% to $54.28, and JPMorgan Chase(JPM) has slipped 1% to $97.77.
What's gotten into financials, which, at least until recently, had been having a pretty decent year? While some have blamed a narrowing yield curve--that is, the difference between short- and long-term Treasuries--we're putting our money on hiccups in tax reform. This morning, we've learned that Obamacare repeal may be added to plan, and that the Senate plan differs from the House plan in some major ways. And even some Republicans are acknowledging that last night's drubbing in Virginia could make overhauling the tax code more difficult.
Why does this matter? KBW's Brian Klock and Glen Manna explain why Tax reform is such a big deal for regional banks (and all banks, really):
If corporate tax reform were to take place as proposed, we estimate the impact could be about 10% and 11% accretive to our 2018 and 2019 EPS estimates in the 25% rate scenario and by 16% and 18% in the 20% rate scenario, holding all else equal...Based on our tax modeling for the House Republicans' proposal, we anticipate that ROTCEs for the median large regional bank could expand beyond our expectations by 130 bps and 210 bps in the 25% and 20% corporate tax rate scenarios to 14.5% and 15.3%, respectively. We believe that with the expansion in ROTCEs and growth rates, P/E multiple expansion could be justified as well.
Not all of that is priced into stocks at this point, of course. But enough of it is that the thought of tax reform not happening is enough to hurt financials.
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