Why Donald Trump's win is a boon for Canadian bank investors

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Canadian bank stocks have long enthralled investors with big dividends and steady profit growth. Now, the banks also have Donald Trump.

Mr. Trump certainly isn't the U.S. president that most investors had been expecting – or wanting – before Tuesday's election upset. Indeed, global stocks appeared to sell off last week on the mere suggestion that he had a chance of winning the White House.

But many observers believe that his victory will have a meaningful impact on bank regulations and loan margins – driving an impressive rally in U.S. bank stocks on Wednesday and giving investors another reason to remain enthusiastic about Canadian banks that have been spending big bucks on U.S. acquisitions.

The KBW bank index, a collection of 24 U.S. banks, was up more than 5 per cent in afternoon trading, hitting a 15-month high. Canada's Big Six bank stocks lagged, rising an average of just 0.5 per cent.

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But if the election news is good for the likes of Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp., it should be good as well for Canadian banks that have been expanding into the United States.

Last year, Royal Bank of Canada completed a $5-billion (U.S.) deal for Los Angeles-based City National Corp., marking its biggest-ever acquisition and backing up RBC's claim that the United States is the bank's "second home market."

Toronto-Dominion Bank has more retail bank branches in the United States than it does in Canada, making its TD Bank division a top-10 U.S. bank by assets. Just last month, TD added more heft with its $1.3-billion deal for Scottrade Bank.

In June, Canadian Imperial Bank of Commerce announced a $4.9-billion (Canadian) acquisition of Chicago-based PrivateBancorp Inc. And Bank of Montreal has a large U.S. presence with Chicago-based BMO Harris Bank, adding Milwaukee-based Marshall & Ilsley Corp. in 2011 and buying GE Capital's transportation finance unit last year.

This U.S. exposure is huge, and the recent expansions were based partly on the expectation that U.S. interest rates would rise with an improving economy. Rising rates give banks a bigger spread between the money they pay savers, in the form of interest on their deposits, and the money they generate from the interest they charge on loans.

This isn't loose change. RBC believes that four U.S. rate hikes, totalling one percentage point, should add at least another $250-million from City National within five years. Under a similar scenario, CIBC expects that higher rates will translate into an estimated $37-million in additional profit from PrivateBancorp.

TD and BMO will no doubt benefit handsomely as well.

Even though some observers believe that Mr. Trump's victory will sideline the Federal Reserve, which had hinted last week that a rate hike could be coming in December, Fed funds futures are still pegging the odds of a rate hike next month at more than 80 per cent.

What's more, some observers expect that Mr. Trump's policies will drive up the rate of inflation, which could be a good thing.

"Trump has questioned the benefits of global trade, which over the past several years has had deflationary implications," analysts at Pavilion Global Markets said in a note. "He tends to favour an expansion of fiscal policy (through either tax cuts or increased spending – or both), presumably leading to a larger budget deficit. These developments are inflationary."

As long-term bond yields rise in anticipation of higher inflation, the spread over short-term bond yields – known as the yield curve – will steepen, again rewarding banks with bigger margins on their loans.

Mr. Trump has also proposed relaxing or even eliminating the 2010 Dodd-Frank Act, which was designed to strengthen the U.S. banking system following the 2008 financial crisis.

Moody's Investors Service believes that suspending the Act would likely reduce bank capital levels and create uncertainties for bond holders. But the credit-rating agency acknowledges that it could also cut the banks' compliance costs, which is good news for shareholders.

Canadian banks have been attracted to the United States in recent years because of its stronger economic growth, recovering housing market and robust capital markets activity. Donald Trump, it seems, comes as a bonus.