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Big Banks Show Strength as Fed Doesn't Taper: Financial Winners

"This FOMC edition feels less dovish than it does outright scared," wrote TD Securities global head of rates and commodity research Eric Green, in a note following the statement release. "The market now has to adjust to a new probability, that tapering is delayed into the new year," he added.

Investors made quite an adjustment to that "new probability," pouring money into 10-year Treasury bonds following the FOMC statement release, sending the yield on the 10-year way down by 15 basis points to 2.70%.

For bank stock investors, the endless "taper talk" misses a very important point: What most banks need for a significant boost to their net interest margins and net interest income is a parallel rise in interest rates. The FOMC has kept the federal funds rate -- its main policy tool -- in a range of zero to 0.25% since the end of 2008. The language in the statement on Wednesday provided a bit more direction on future policy for the federal funds rate from previous statements.

The FOMC made a slightly change in its language from the previous statement, saying its "highly accommodative" policy for short-term rates would "remain appropriate" at least until the national unemployment rate drops below 6.5%, assuming inflation projections remain in check, but added that it was likely to keep the federal funds rate in its current range "for a considerable time after the asset purchase program ends and the economic recovery strengthens."

Considering that the tapering hasn't even started, this is bad news for bankers hoping for a parallel rise in rates.

Illustrating just how important an eventual rise in short-term rates will be for bank profits, Deutsche Bank analyst Ryan Nash on Tuesday estimated that a gradual parallel rise in interest rates of 200 basis points -- which he acknowledged "rarely (if ever) happens -- would lead to a $1.178 billion increase in Citigroup's annual net interest income. Nash went further, estimating that $1.090 of the increase in Citi's net interest income would come from a rise in short-term rates.

The KBW Bank Index (I:BKX) was up just 0.2% to close at 64.72, with 14 of the 24 index components ending the trading session with declines. The subdued overall reaction among bank-stock investors may have reflected concern over the industry's profitability as short-term rates remain near zero.

Big banks ending with stock gains of over 1% included Bank of America (BAC - Get Report), which closed at $14.71, and Wells Fargo (WFC - Get Report), which closed at $43.31.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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