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Banks' Worst Fear: Sudden Rise in Interest Rates

Deutsche Bank analyst Matt O'Connor notes that the "magnitude of interest rate rise is key." A 100 basis point -- 1 percentage point -- rise would likely be positive for banks because it will boost margins without meaningfully hurting book value. But a 300 basis point rise will likely hit Basel III Capital ratios by anywhere between 200 and 400 basis points, the analyst estimates. It would also hit mortgage production and lead to higher deposit costs.

Murray notes that regulators and banks are focused on this issue. The prospect of an interest rate shock figured prominently in the Federal Reserve's stress tests and bank disclosures suggest that their balance sheets are positioned for an interest rate rise, meaning banks will be able to improve their earnings over time.


The Fed has also been transparent in communicating its intentions to keep interest rates low and in providing thresholds for an interest rate rise.

Based on bank filings, Nomura believes Bank of America (BAC - Get Report) and Regions Financial (RF - Get Report) will benefit most from rising interest rates, based on the impact to their earnings per share. Huntington Bancorp (HBAN) and SunTrust (STI - Get Report) could see pressure on interest-bearing deposits.

Deutsche Bank's O'Connor believes JPMorgan Chase (JPM - Get Report) will be best placed among the big banks, while Wells Fargo (WFC - Get Report) stands to lose, since it has seen a 25% rise in its securities portfolio in the past two years and has a large mortgage business.

-- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

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