The overall market’s  performance has been great in 2017. With gradual improvement in the U.S. economy, rising rate environment, potential benefits from lower tax rates and growing investor optimism regarding reduced regulations, the banking industry has emerged as one of the best performers this year.

Although bank stocks did not gain much in the first few months of the year, the S&P Regional Banks Select Industry Index and the KBW Nasdaq Bank Index have gained nearly 8.4% and 17.8%, respectively, so far this year.

Why the Rally Will Likely Continue in 2018

Higher interest rates: The Fed has plans of increasing interest rates thrice in 2018. While this alone has the potential to drive the markets, anticipated higher inflation may lead the central bank to move the interest rate higher at a faster pace, as economic growth improves further. Higher rates help banks in expanding their net interest margins, which drives revenue growth. Even if the interest rate increases take place at the expected pace, it will further strengthen financial performance of banks.

Reduced tax burden: The passage of the amended tax bill by the Senate will likely drive bank stocks’ earnings in 2018. While the reduction in corporate tax rates from 35% to 21% will have a positive impact on all the sectors, it is likely to benefit banks the most as they are among the highest tax payers in the United States. Although the news has already given a boost to investor confidence, the benefit of the same is expected to be witnessed next year.

Also, driven by the tax legislation provisions related to repatriation of overseas cash, mergers and acquisitions are likely to increase in the United States, which will boost banks’ investment banking income. Also, since the tax bill will lower tax rates for the rich, the wealth management divisions of banks will likely witness an increase in cash flow.

Although lower taxes will reduce the tax deductible expenses for banks that will likely weigh on their profitability, the overall impact of the tax bill is projected to be a positive.