This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Interest Rate Rise Complicates Banking Recovery

The reality is that as interest rates rise from generational lows over the next few quarters, many large banks may struggle to maintain their recent strength.

A recent bubbling of investor confidence in large banks may wind up disappointing investors, in the short run.

The good news, however, is that rising interest rates are likely to be beneficial to the earnings of most banks over the long term. The industry also appears far better equipped to handle writedowns than at any previous point in recent memory.

Bill Smead, chief investment officer for mutual fund Smead Capital says lenders like Wells Fargo will see larger gains from loan portfolios than losses from securities books.

Smead, who began building stakes in large banks like Wells Fargo in 2009, takes a long view on investors' current daily obsession with interest rate moves. He expects the current rise in interest rates will allow banks to begin investing their excess capital in new loans instead of debt securities. Such a scenario would mark a strengthening earnings cycle for the banking sector.

In fact, as the yield curve steepens, Smead is more concerned with an eventual flattening years down the line. "Banks have been disappointing investments as you move from a steep yield curve to an inverted yield curve," he said.

The current rise in interest rates may expose overly-optimistic near-term valuations across the banking sector. A minimal long-term impact of bond portfolio writedowns could also strengthen arguments that the industry is far healthier than it was last time the Fed began to raise interest rates.

-- Written by Antoine Gara in New York

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.58 -1.40%
C $46.40 -0.71%
JPM $63.33 -0.42%
WFC $50.09 -0.63%
AAPL $93.81 -1.10%


Chart of I:DJI
DOW 17,768.03 -62.73 -0.35%
S&P 500 2,059.70 -16.11 -0.78%
NASDAQ 4,764.9010 -40.39 -0.84%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs