Regional Banks: Financial Winners

NEW YORK ( TheStreet) -- Shares of regional banks surged on Friday on expectations that they would benefit from higher rates as the Federal Reserve winds down its monetary stimulus program.

The SPDR KBW Regional Banking ETF ( KRE) rose 0.9%, outperforming gains posted by the KBW Bank Index ( BKX) and the S&P 500.

After Fed Chairman Ben Bernanke said Wednesday that the central bank may begin to curtail its bond purchases later this year if it continues to see good data, markets went into a tailspin. Long-term interest rates spiked, interest-rate futures contracts fell and the dollar rose, all suggesting that the central bank might hike rates sooner than expected.

On Friday, markets recouped some of their lost ground, with the Dow Jones Industrial Average and S&P 500 ending up 0.3%, while the Nasdaq slipped 0.2%.

Although Bernanke stressed that the Federal Reserve will not raise short-term interest rates until unemployment falls to at least 6.5%, and that any increases will be gradual, investors are already reallocating their investments in preparation for higher rates.

Bank stocks are poised to benefit, although a sudden and unexpected rise in interest rates could hurt banks that have a large securities portfolio. Interest rates and bond values move in opposite directions.

Still, if the interest rate rise is gradual, banks would benefit from a steeper yield curve. Regional banks in particular could do well.

Regional bank stocks tend to be focused on traditional banking activities of deposit taking and lending and therefore make the bulk of their income from the "spread" between interest rates paid on loans and the interest payable on deposits, also known as the net interest margin.

When rates rise, banks are typically able to charge more on their loans, but the interest rates payable on deposits tends to respond with a lag. So most banks are likely to see their spreads widen.

Among the large-cap regional banks, shares of BB&T ( BBT) and Comerica ( CMA) were the biggest gainers, rising 2.1% and 3.2% respectively.

Synovus ( SNV) and United Bankshares ( UBSI) were winners among the smaller regionals, gaining more than 3% each.

The big money center banks, in contrast, finished in the red. Shares of Bank of America ( BAC) slipped 1.5%. Shares of Citigroup ( C) lost 2% and JPMorgan Chase ( JPM) dipped by 0.8%.

Shares of Wells Fargo ( WFC) were an exception, finishing the day up by 2%.

In banking news, Morgan Stanley ( MS) said it has received regulatory clearance to purchase the remaining 35% stake in brokerage Morgan Stanley Smith Barney from Citigroup ( C), a deal that has been in the making for four years.

Morgan Stanley has since the crisis pushed more deeply into wealth management, which offers a less volatile revenue stream than traditional investment banking and trading activities.

Meanwhile, Citigroup has shed businesses it considers non-core. Shares of Morgan Stanley fell 0.9% , while that of Citigroup was down by over 2%.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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