Bank Stocks to Benefit From Rising Interest Rates

NEW YORK (TheStreet) -- Bond yields are beginning to rise, which bodes well for earnings of several financials, KBW analysts said in a research note on Friday.

The yield on the 10-year treasury note has risen in the last couple of weeks to past 2.3%. Investors appear to be abandoning safe havens for more risky assets amid better domestic economic data and as expectations for additional monetary stimulus from the Fed declined.

Markets are also beginning to price in an earlier short-term interest rate hike by the Fed. On Friday, Federal Reserve Bank of Richmond Jeffrey Lacker said that the Fed may have to raise short term rates as soon as 2013 because economic conditions did not warrant keeping rates near zero for an extended period. The Fed has previously indicated that it would keep interest rates near zero until late 2014.

Uncertainty about interest rates would lead to increased trading volumes and hedging benefiting fixed income trading revenues. According to KBW analysts led by Frederick Cannon, Goldman Sachs (GS) is best placed to benefit.

A steepening yield curve- that is a widening spread between rates on long-term bonds and short term bonds- also benefits banks that are looking to deploy excess liquidity. Astoria Financial (AF) Bank of Hawaii (BOH), City National (CYN) Hudson City Bancorp (HCBK) New York Community Bancorp (NYB) and Washington Federal (WAFD).

These stocks should benefit irrespective from a steeper yield curve, irrespective of what happens to short-term rates, according to the analysts.

The "more challenging investment thesis" in the analysts opinion is trying to play off expectations of rising short-term rates, because the Fed has said it is committed to keeping short-term rates low till 2014. Investors therefore need to be more cautious in their investment approach.

Still, asset-sensitive banks poised to benefit include Capitol Federal Financial (CFFN), City Holding (CHCO), City National, Huntington Bancorp (HBAN) and Prosperity Bancshares (PB).

-- Written by Shanthi Bharatwaj from New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.