This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Banks That Will Benefit the Most From Rising Interest Rates

According to Usdin, NIM compression "has made it tough to grow net interest income, even with better-than-expected loan growth." With the yield on 10-year U.S. Treasury bonds rising to over 2% from 1.62% two months ago, Usdin said the "steepening of the yield curve will help limit NIM downside."

Mortgage banking revenue has also been a source of strength for regional banks over the past year, but the rise in 10-year yield has narrowed the spread between mortgage loan rates and the yields on mortgage-backed securities. This means lower gains for banks on the sale of newly originated mortgage loans to government-sponsored enterprises, including Fannie Mae and Freddie Mac. Usdin said "a retreat to 2011 margins would drive a 30%-40% decline in production revenue even if origination volumes hold flat."

A "Rate Trade"

So where's the silver lining for investors? Usdin said that with the rise in the yield on 10-year Treasuries, "bank stocks are moving again in anticipation of higher rates."

"While we continue to believe the Fed will remain committed to its current course and rates will not move until 2015, we recognize that sentiment could hold sway in investors' minds."

Some investors may expect to see a faster and sharper increase in short-term rates, and truly long-term investors who can commit for several years may eventually see a tremendous benefit from a friendlier rate curve.

Usdin listed the regional banks that Jefferies would expect to see the most significant increase in earnings if short-term rates rose by 200 basis points, based on detailed balance sheet data from third-quarter 10-Q filings. Here are the top three from that list, with projections based on the firm's 2013 earnings estimates:
  • Jefferies estimates that PrivateBancorp(PVTB - Get Report) of Chicago will earn $1.25 a share this year without any action by the Fed to raise short-term rates. Based on that estimate, Usdin said the company's EPS would rise by 58% to $1.97 if short-term rates rose by 200 basis points.
  • For Zions Bancorporation(ZION - Get Report), Jefferies estimates 2013 EPS of $1.60. If short-term rates were to rise by 200 basis points, Usdin estimates the company's earnings would rise by 45% to $2.32 a share.
  • Jefferies is estimating that SVB Financial Group(SIVB - Get Report) of Santa Clara, Calif., will earn $3.75 a share in 2013. If short-term rates were to rise by 200 basis points, Usdin estimates that the company's EPS would increase by 40% to $5.26.

Other regional names that Jefferies would expect to see earnings increases of 30% or more if short-term rates were to rise by 200 basis points include Peoples United Financial (PBCT) of Bridgeport, Conn., and Astoria Financial (AF) of Lake Success, N.Y.

Downgrading Four Regional Banks

BernsteinResearch analyst Kevin St. Pierre on Thursday said "we believe any optimism around the potential impact of higher rates is premature and overstated." The analyst also said that "after significant outperformance in 2012, we believe the U.S. regional banks appear, on average, modestly overvalued when viewed against forward earnings power."
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
CMA $43.37 0.00%
KEY $12.19 0.00%
PVTB $40.87 0.00%
RF $9.24 0.00%
SIVB $100.76 0.00%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs