Rising Rates Seen As Bullish for Financial Stocks

NEW YORK ( TheStreet) -- The rising interest rate environment should benefit many financial stocks, as a steeper yield curve spells improved profit margins in their traditional business of borrowing short term and lending long term, analysts say.

Bank stocks initially sell off as interest rates begin to rise, though investors should expect that to change over time, Sandler O'Neill strategist Robert Albertson told Bloomberg News Monday.

"With the rates this low, most investors I talk to recognize the relief in rates--up--is going to drive margins, so it's a positive for wealth," Albertson said.

Accordingly Citigroup, upgraded several broker dealer and asset management stocks on Monday.

The Charles Schwab Corporation ( SCHW) and FXCM ( FXCM) were among broker dealers receiving upgrades from Citigroup on the view that Federal Reserve "tapering" of its unprecedented stimulus will ultimately benefit the sector.

Broker dealers will "remain defensive should equities markets correct (likely due to rates normalization) but outperform should markets bounce on outsized EPS leverage and pro-cyclicality," argue Citigroup's analysts, who upgraded the sector to Neutral/Positive from Negative/Neutral.

In addition to upgrading Schwab to "buy" from "sell" and FXCM to "buy" from "neutral," Citi's analysts raised price targets on TD Ameritrade ( AMTD) and LPL Financial Holdings ( LPL).

Citigroup also expects U.S, focused asset managers to benefit from a more hawkish Federal Reserve, and its analysts argue T. Rowe Price ( TROW) is "the best U.S. equities play in the sector." They upgraded T Rowe price to "buy," and lifted Eaton Vance ( ETN) to "neutral" from "sell." However, they lowered price targets on global managers including Alliance Bernstein ( AB), Franklin Resources ( BEN), BlackRock ( BLK) and Legg Mason ( LM).

Schwab's new $24 price target compared to a $20.64 closing price Friday. The low interest rate environment has forced the broker dealer to waive fees it traditionally charges investors in its money market funds. Higher interest rates means it can begin charging those fees once again. Further, Citigroup's analysts expect Schwab will see improved net interest margins by borrowing short and lending long.

In his annual shareholder letter, JP Morgan ( JPM) chief Jamie Dimon warned about rising interest rates, but noted the bank could benefit handsomely.

"Although we are not predicting it, we need to be prepared for rapidly rising rates, potentially even worse than we have seen in recent history," Dimon wrote.

"One of the ways we do this is to position our company - if all things are equal - so we can benefit from rapidly rising interest rates. As we currently are positioned, if rates went up 300 basis points, our pre-tax profits would increase by approximately $5 billion over a one-year period. Remember, however, that all things are not equal, and that $5 billion of improved income should be looked at as an additional cushion to protect us from other bad outcomes."

-- Written by Dan Freed in New York.

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

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