Here’s Why Higher Interest Rates Are Not Positive for Regional Banks
Bloomberg News
Higher interest rates are not positive for regional banks. Yet Wall Street analysts and economists are recommending investments in regional banks, such as BB&T (BBT) - Get Report , Fifth Third Bancorp (FITB) - Get Report , PNC Financial (PNC) - Get Report , Regionals Financial (RF) - Get Report , SunTrust (STI) - Get Report , U.S. Bancorp (USB) - Get Report and Zions Bancorp (ZION) - Get Report , on the theory that higher rates are positive to the bottom line.
The FDIC Quarterly Banking Profile for the second quarter of 2015, however, supports the notion that higher interest may not be bullish for bank stocks. Here's why.
Let's start with a quote from a news release by the Federal Deposit Insurance Corporation covering the Quarterly Banking Profile for the second quarter: "The average net interest margin (the difference between the average yield on banks' interest-earning investments and the average interest expense of funding those investments) rose to 3.06% in the second quarter from 3.02 percent in the first quarter, but remained below the 3.15 percent average in second-quarter 2014. Average margins at community banks of 3.57 percent in the second quarter were up from 3.54 percent in the first quarter, but down from 3.61 percent in second-quarter 2014."
FDIC Chairman Martin J. Gruenberg indicated that "the low interest-rate environment remains a challenge. Many institutions have responded by acquiring higher-yielding, longer-term assets, but this has left banks more vulnerable to rising interest rates and that is a matter of ongoing supervisory attention."
What this means is, in a rising-rate environment, a longer-maturity bond will decline in price by a larger dollar amount for the same rise in yield of a shorter-maturity bond. In addition, if an investment is in a non-U.S. bond the yield spread will likely widen vs. the corresponding U.S. Treasury equivalent.
Then there is the accounting component. Securities can be held in three accounting categories that determine how realized, unrealized gains and losses are recognized.
Securities in trading accounts are marked-to-market and any net price changes unrealized or realized are recognized in current income. This may include inventory that may have been purchased before yields rose.
Securities held for sale are marked-to-market with any unrealized price changes reported "below the line" in comprehensive capital until actual sales are made when gains and losses move to current income. The inability to take losses will adversely impact a decision to make loans, which is not positive for banks.
For securities held to maturity, any price change up or down is unrealized and is reported as a footnote item. Sales of a small factor (less than 15% of original par) are allowed, but any more than that has to be removed from this securities category.
Bottom line: Risky bond investments and accounting issues are among the reasons higher rates are not positive for regional banks. Meanwhile, seven regional banks have been on the rise so far in the fourth quarter on the mislead notion that Federal Reserve rate hikes are positive.
Here's the weekly chart for BB&T Corp.
Courtesy of MetaStock Xenith
BB&T Corp had a close of $38.31 on Wednesday up 7.6% so far in the fourth quarter but down 1.5% year to date. The weekly chart is positive with the stock above its key weekly moving average of $37.58. Note that the 200-week simple moving average was tested during the week of Oct. 2 when this average was $34.56. Weekly momentum is projected to rise to 48.44 this week, up from 39.68 on Nov. 6.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $42.59, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for Fifth Third Bancorp.
Courtesy of MetaStock Xenith
Fifth Third Bancorp had a close of $20.41 on Wednesday, up 8% so far in the fourth quarter and up just 0.2% year to date. The weekly chart is positive with the stock above its key weekly moving average of $19.69 and above its 200-week simple moving average of $18.20. Note that the 200-week simple moving average was tested during the week of Oct. 2, when this average was $34.56. Weekly momentum is projected to rise to 41.04 this week up from 30.49 on Nov. 6.
Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $22.27, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for PNC Financial.
Courtesy of MetaStock Xenith
PNC Financial had a close of $95.11 on Wednesday, up 6.6% so far in the fourth quarter and up 4.3% year to date. The weekly chart is positive with the stock above its key weekly moving average of $92.01 and well above its 200-week simple moving average of $76.96. Weekly momentum is projected to rise to 52.67 this week, up from 43.72 on July 6.
Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $104.82, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for Regions Financial.
Courtesy of MetaStock Xenith
Regions Financial had a close of $9.95 on Wednesday up 10.4% so far in the fourth quarter, but down 5.8% year to date. The weekly chart is positive with the stock above its key weekly moving average of $9.58 and above its 200-week simple moving average of $8.91. Weekly momentum is projected to rise to 44.99 this week up from 34.66 on Nov. 6.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $10.75, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for SunTrust.
Courtesy of MetaStock Xenith
SunTrust Banks had a close of $43.45 on Wednesday up 13.6% so far in the fourth quarter and up 3.7% year to date. The weekly chart is positive, with the stock above its key weekly moving average of $41.64 and well above its 200-week simple moving average of $34.19. Weekly momentum is projected to rise to 56.79 up from 47.81 on Nov. 6.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $46.95, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for U.S. Bancorp.
Courtesy of MetaStock Xenith
U.S. Bancorp had a close of $43.33 on Wednesday, up 5.7% so far in the fourth quarter and down 3.6% year to date. The weekly chart is positive with the stock above its key weekly moving average of $42.52 and well above its 200-week simple moving average of $38.22. The weekly momentum reading is projected to rise to 51.44 up from 43.88 on Nov. 6.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $48.41, which is a key level on technical charts until the end of 2015.
Here's the weekly chart for Zions Bancorp.
Courtesy of MetaStock Xenith
Zions Bancorp had a close of $30.48 on Wednesday, up 10.7% so far in the fourth quarter and up 7.3% year to date. The weekly chart is positive, with the stock above its key weekly moving average of $29.25 and above its 200-week simple moving average of $26.20. The weekly momentum reading is projected to rise to 53.78 up from 43.35 on Nov.6.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $30.76 or $38.51, which are key levels on technical charts until the end of 2015.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.