NEW YORK (TheStreet) -- The rising interest rate environment should benefit many financial stocks, as a steeper yield curve spells improved profit margins in their traditional business of borrowing short term and lending long term, analysts say.
Bank stocks initially sell off as interest rates begin to rise, though investors should expect that to change over time, Sandler O'Neill strategist Robert Albertson told Bloomberg News Monday.
"With the rates this low, most investors I talk to recognize the relief in rates--up--is going to drive margins, so it's a positive for wealth," Albertson said.
Accordingly Citigroup, upgraded several broker dealer and asset management stocks on Monday.The Charles Schwab Corporation (SCHW) and FXCM (FXCM) were among broker dealers receiving upgrades from Citigroup on the view that Federal Reserve "tapering" of its unprecedented stimulus will ultimately benefit the sector. Broker dealers will "remain defensive should equities markets correct (likely due to rates normalization) but outperform should markets bounce on outsized EPS leverage and pro-cyclicality," argue Citigroup's analysts, who upgraded the sector to Neutral/Positive from Negative/Neutral. In addition to upgrading Schwab to "buy" from "sell" and FXCM to "buy" from "neutral," Citi's analysts raised price targets on TD Ameritrade (AMTD) and LPL Financial Holdings (LPL). Citigroup also expects U.S, focused asset managers to benefit from a more hawkish Federal Reserve, and its analysts argue T. Rowe Price (TROW) is "the best U.S. equities play in the sector." They upgraded T Rowe price to "buy," and lifted Eaton Vance (ETN) to "neutral" from "sell." However, they lowered price targets on global managers including Alliance Bernstein (AB), Franklin Resources (BEN), BlackRock (BLK) and Legg Mason (LM). Schwab's new $24 price target compared to a $20.64 closing price Friday. The low interest rate environment has forced the broker dealer to waive fees it traditionally charges investors in its money market funds. Higher interest rates means it can begin charging those fees once again. Further, Citigroup's analysts expect Schwab will see improved net interest margins by borrowing short and lending long. In his annual shareholder letter, JP Morgan (JPM) chief Jamie Dimon warned about rising interest rates, but noted the bank could benefit handsomely.
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