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.
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."