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2 Banks to Benefit the Most From a Steeper Yield Curve

Stocks in this article: WFC STT RF FHN ZION

First Horizon National (FHN), Regions Financial (RF) and Zions Bancorporation (ZION) "have more than 70% of their respective assets in the tactical pool (assets with maturities or repricing under one year), while less than 50% of their respective funding would be in the tactical pool," according to Mosby. "This leaves 20% of their balance sheets ready to reprice when short-term rates begin to rise, with no corresponding increase in funding costs tied to those assets."

These banks would see their net interest margins increase by roughly 40 basis points if the Federal Reserve were to raise the federal funds rate by 1 percentage point, according to Guggenheim's data. "However, we would not expect this impact until late 2014 or early 2015," Mosby wrote.

For some investors, that's a long time to wait. In the meantime, a steepening yield curve allows banks "that have more strategic assets than strategic funding sources to take advantage of those higher interest rates to help stabilize their net interest margins as we move further into 2013," according to Mosby.

Wells Fargo (WFC) and State Street (STT) "would benefit the most from a yield curve steepening," among the large-cap banks covered by Guggenheim. Mosby said that "these are the only two banks in our coverage that have more assets than funding sources in the strategic pool (assets and funding with maturities over three years)."

As part of his analysis, Mosby used Moody's forecasts that 5-year market rates would rise by about 70 basis points over the next six months, with 1-year rates rising by another 50 basis points. Moody's is also forecasting that "the 5-year and 10-year securities to be approximately 150 basis points and 110 basis points higher than their current levels, respectively."

Wells Fargo's fourth-quarter net interest margin was 3.56%, narrowing from 3.66% in the third quarter and 3.89% in the third quarter of 2011. The company's net interest income was $10.64 billion in the fourth quarter, declining from $10.66 billion the previous quarter and $10.89 billion a year earlier. If the Fed takes no action, while the yield curve steepens by 1 percentage point, Mosby estimates that Wells Fargo's net interest margin will widen by 20 basis points to 3.66%.

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