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Banks That Could Benefit the Most from Rising Interest Rates

03/15/2016 10:25 am EST


Michael Berger

President & Founder,

Many investors are currently wondering which banks are likely to benefit the most from rising interest rates, so Michael Berger, of, shares the names of five banks he expects to and why.

Last week, the European Central Bank’s (ECB) Governing Council pulled out all the stops to avoid a potentially dangerous deflation-trap by easing monetary policy on a number of fronts.

Despite significant criticism from Germany, the ECB cut its main interest rate to 0% from 0.05%; the interest rate on the deposit facility was cut to -0.4% from -0.3%; and the interest rate on the marginal lending facility was cut to 0.25% from 0.3%.

ECB Also Expands QE Program

The ECB also expanded its quantitative easing program from 60 billion euros to 80 billion euros a month starting in April and it now includes investment grade euro-denominated corporate bonds.

The central bank also initiated a new series of four targeted long term refinancing operations (each has a 4-year maturity) which pays banks to lend money. The program will start in June and borrowing conditions can be as low as the interest rate on the deposit facility.

The global market saw a negative initial reaction to this announcement but it had fully recovered by Friday. We believe that the recovery was driven by a potential agreement to not enter into a competitive devaluation game at the G-20 meeting last week.

Bank of Japan Does Not Add to Stimulus

This morning, the Bank of Japan (BOJ) announced no change to its record monetary stimulus as policy makers gauge the impact of the negative interest-rate strategy which was adopted in January.

The big difference between the actions taken by the BOJ and ECB can be found when you read into the statements made following the banks’ respective announcements.

After the ECB made its announcement, ECB President Mario Draghi said they do not plan on decreasing rates any further. This differs from BOJ Governor Haruhiko Kuroda who said it will utilize its arsenal of monetary easing tools if necessary.

All Eyes on FOMC

The Federal Reserve is universally expected to keep short-term interest rates on hold and the wording of the policy statement should be consistent with a cautiously optimistic outlook. Fed Chairman Janet Yellen should provide more detail on the economic outlook policy plans.

We expect Yellen to continue to stress that monetary policy will be data-dependent. In her press conference, Yellen will likely be given a chance to address a number of financial market concerns, such as the monetary policy impact on exchange rates, strong dollar, and the possibility of negative interest rates.

Invest in Banks Levered to Rates

We recommend that investors look for banks that offer a differentiated product or are focused on a niche sector that can grow faster than the industry. Investors should continue to own banks that are seasoned acquirers and can use their currency advantage to drive EPS growth. Also, look for banks that create value for shareholders through M&A, stock buybacks, and dividend hikes.

We expect to see small- to mid-cap banks outperform the banking industry due to lower regulatory costs, leverage to rate increases, and fewer revenue headwinds. Larger regional banks will face upward pressure on regulatory and technology costs as well as revenue headwinds due to the inability to improve profitability without higher rates.

So the real question many investors are asking themselves is, which banks are most likely to benefit from rising interest rates? The companies we expect to benefit the most are SVB Financial (SIVB), Bank of America (BAC), Bank of the Ozarks, Inc. (OZRK), Wintrust Financial (WTFC), and BofI Holding, Inc. (BOFI).

By Michael Berger, President and Founder,

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