SIVB: To Benefit from Higher Interest Rates?

11/23/2015 11:42 am EST

Focus: FINANCIALS

Michael Berger

President & Founder, Technical420.com

Though many investors expect to see stocks sell-off once the Federal Reserve begins to increase interest rates, Michael Berger, of Technical420.com, doesn't believe this is the case and highlights one bank that he thinks could stand to benefit.

The S&P 500 (SPX) has rallied more than 10% off of its lows on August 25 and September 28 and many analysts are trying to determine where the index will trade from here. If you look at these movements on a graph, the pattern forms a “W” shape and a double bottom was formed in the 1867-1880 range. This sell-off was driven by two main factors: a Chinese slowdown and devaluation fear; and by a fear related to the Fed increasing interest rates.

Although the Chinese economy has slowed down, it is still growing by more than 6%. Also, China’s alleged currency devaluation was not really a devaluation. It was a poorly executed reset of the renminbi. The purpose of the reset was to give China a chance at joining the International Monetary Fund (IMF).

When it comes to interest rates, the market should expect to see an interest rate hike in the near future. The market, however, seems to be asking the wrong question. Instead of asking when the increase will happen, the market should be trying to figure out what the pace of the rate increase will be. We expect to see Janet Yellen and the Fed slowly increase interest rates.

Increasing Interest Rates Does Not Hurt Everyone

As interest rates increase, small- to mid-size regional banks should be the greatest beneficiaries. Companies such as SVB Financial Group (SIVB) would see net interest income increase by more than 20% with a 200 basis point increase to short-term rates.

SIVB operates in one of the hottest economic markets in the United States (Silicon Valley and San Francisco) and they are focused on booming industries (technology, life sciences, venture capital, and private equity).

Over the next year, we expect to see SIVB to continue to produce peer-best loan growth and the company’s expertise in banking innovation will continue to transition well into the international community. SIVB recently received a license to transact business in the Chinese currency and we expect to see this start to impact the company’s bottom line during 2016.

During 2015, SIVB has seen shares increase by 11.2% and SIVB is trading at $129.14. At current levels, SIVB is trading above its 20- and 50-day moving average and shares are approaching the 200-day moving average ($130.73). Momentum has been trading flat and we expect to see shares test the $139-$141 support levels once momentum picks back up.

Outlook

Although many investors expect to see stocks sell-off once the Federal Reserve begins to increase interest rates, we do not believe this is the case. If history is our guide, we should expect to see mixed performance initially after the rate increase. This choppiness is typically followed by strong performance.

Michael Berger, Founder and President, Technical420.com

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