Wells Fargo, M&T Drive Banks Higher as Wall Street Bets on June Hike

The banking sector is seeing green:  Wells Fargo (WFC) - Get Report , KeyCorp (KEY) - Get Report  and M&T Bank (MTB) - Get Report  climbed Friday amid higher odds that the Federal Reserve will raise short-term interest rates in June.

Members of the central bank's monetary policy committee "judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the committee's 2% objective," then a June increase would probably be justified, according to minutes from the panel's April meeting, released Wednesday. 

Trading in futures linked to the Federal Funds Rate, the central bank's benchmark, signal a 28% chance that the central bank will double interest rates, to a range of 0.5% to 0.75%, in June, a significant shift from days ago when there was almost no chance of a midyear jump.

The KBW Bank Index, used to track the performance of the banking sector, rose as much as 1.3% on Friday before paring gains. Low interest rates have curbed banking profits since the financial crisis of 2008, when the Federal Reserve cut them to nearly zero to bolster the economy; they remained at that level until a 25 basis-point hike in December.

While the Fed signaled then that it might raise rates as many as four times this year, the central bank quickly trimmed the outlook by half amid global market volatility at the start of the year driven by plummeting oil prices, slowing growth in China and uncertainty about whether Great Britain would remain in the European Union.

TheStreet's Jim Cramer says he doesn't understand the Fed's sense of urgency about raising rates because there are no signs of a "bubble," as with the highly valued "unicorn" tech companies or the runup in oil prices.

"There's been many bubbles in history, where it would be great to raise margin rates," said Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, which own Wells Fargo. "But there's none now." 

While banking industry stocks slid earlier this year, with falling crude prices spurring concern that oil and gas companies would default on loans, the Fed has a relatively positive outlook on the sector.

"Growth of commercial and industrial loans on banks' books remained strong and continued to be driven by lending to investment-grade borrowers by large banks" during the first quarter, according to the minutes. "Indicators suggested that the financial system was fairly resilient, as did the absence of a significant increase in funding stresses or margin calls earlier this year when prices of risky assets fell and volatility rose sharply."

The Fed did, however, note a survey that indicated banks were expecting higher "delinquencies and charge-offs on existing loans to firms in the energy sector," as well as other businesses operating in areas where income is largely dependent on the energy industry.

Wells Fargo's shares rose 0.9% to $48.83 in afternoon trading.  The San Francisco-based bank beat its first quarter estimates and recorded a 7% jump in average loans to $972.2 billion. 

"While the persistent low-rate environment, market volatility and continued weakness in the oil and gas industry provided some near-term headwinds, our long-term results continue to be driven by our focus on the real economy," chairman and CEO John Stumpf said on an earnings call in April.

The company's net interest margin, which compares interest earned on loans to the amount paid on the deposits, has seen a continuous decline from 3.26% in the fourth quarter of 2013 to 2.9% in the first quarter of 2016. That reflects the long period of zero-bound rates, since banks typically are able to boost the margin by passing on higher rates more quickly to borrowers than to depositors.

KeyCorp's shares climbed  0.61% to $12.47, as the Cleveland, Ohio-based bank continues to benefit from a 5.4% gain in average loans during the first three months of the year. That was due mostly due to a double-digit increase in financial, commercial, and agriculture credit.

M&T Bank shares, meanwhile, gained 0.38%, to trade at $116.26. The Buffalo, New York-based company beat analysts' first-quarter estimates, and CFO Ren Jones reported "strong growth in net interest income, solid loan growth and stable credit performance." Its net interest margin declined from 3.56% in the fourth quarter of 2013 to 3.18% in the first quarter of 2016.  

EXCLUSIVE LOOK INSIDE: Wells Fargo and Citigroup are holdings in Jim Cramer's Action Alerts PLUS charitable trust portfolio. Want to be alerted before he buys or sells the stock? Learn more now.