NEW YORK (
) -- Shares of regional banks surged on Friday on expectations that they would benefit from higher rates as the
winds down its monetary stimulus program.
SPDR KBW Regional Banking ETF
rose 0.9%, outperforming gains posted by the
KBW Bank Index
and the S&P 500.
After Fed Chairman Ben Bernanke said Wednesday that the central bank may begin to curtail its bond purchases later this year if it continues to see good data, markets went into a tailspin. Long-term interest rates spiked, interest-rate futures contracts fell and the dollar rose, all suggesting that the central bank might hike rates sooner than expected.
On Friday, markets recouped some of their lost ground, with the
Dow Jones Industrial Average
ending up 0.3%, while the
Although Bernanke stressed that the Federal Reserve will not raise short-term interest rates until unemployment falls to at least 6.5%, and that any increases will be gradual, investors are already reallocating their investments in preparation for higher rates.
Bank stocks are poised to benefit, although a sudden and unexpected rise in interest rates could hurt banks that have a large securities portfolio. Interest rates and bond values move in opposite directions.
Still, if the interest rate rise is gradual, banks would benefit from a steeper yield curve. Regional banks in particular could do well.
Regional bank stocks tend to be focused on traditional banking activities of deposit taking and lending and therefore make the bulk of their income from the "spread" between interest rates paid on loans and the interest payable on deposits, also known as the net interest margin.
When rates rise, banks are typically able to charge more on their loans, but the interest rates payable on deposits tends to respond with a lag. So most banks are likely to see their spreads widen.
Among the large-cap regional banks, shares of
(BBT - Get Report)
(CMA - Get Report)
were the biggest gainers, rising 2.1% and 3.2% respectively.
were winners among the smaller regionals, gaining more than 3% each.
The big money center banks, in contrast, finished in the red. Shares of
Bank of America
slipped 1.5%. Shares of
(C - Get Report)
lost 2% and
(JPM - Get Report)
dipped by 0.8%.