Neil Macneale, is well known for compiling an ongoing model portfolio based on companies that have a...
4 Banks That Could Benefit the Most from Rising Interest Rates
12/23/2015 10:36 am EST
Many investors are currently wondering which banks are likely to benefit the most from rising interest rates, so Michael Berger, of Technical420.com, shares the names of four banks he expects to and why.
After the Federal Reserve raised interest rates for the first time since June 2006, many Wall Street firms improved their outlook on the banking sector. Even though we think the initial rate will have a minimal fundamental impact, many bank stocks are well positioned to outperform the market in the near term. The pace of the Fed’s future rate hikes is actually the major driver of the real impact on banks’ income statements.
We expect to see the Fed raise interest rates two additional times during the first half of 2016 and then freeze rates during the second half of the year. The reason why we expect this to happen is because the Fed wants to see how the initial rate hikes play out and to let credit trends normalize. If this theory comes to fruition, this would be a headwind for bank stocks and they could underperform the market during the second half of 2016.
From a fundamentals perspective, valuations are attractive when compared to other S&P sectors. The combination of a slow-moving Fed, an inflection in credit spreads, and increasing regulatory and technology costs, however, could lead to downward earnings revisions during the second half of 2016.
Invest in Banks That Possess the Right Characteristics
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.
Which Banks Will Benefit the Most from 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 (SVB), Bank of America (BAC), Wintrust Financial (WTFC), and Texas Capital (TCBI).
Stay tuned because next week we will discuss which banks will be affected by the recent fall in energy prices.
Michael Berger, Founder and President, Technical420.com
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