Bank Stocks: Yellen Winners

NEW YORK ( TheStreet) -- Fifth Third Bancorp ( FITB) of Cincinnati was the winner among the nation's largest banks on Wednesday, riding 1.4% to close at $17.75.

The broad indices ended mixed, but bank stocks fared well, with the KBW Bank Index ( I:BKX) rising 0.4% to 61.47 and all but four of the 24 index components ending with gains.

On Day 8 of the federal government's partial shutdown, investors turned their attention away from a possible U.S. default on debit payments to President Obama's nomination of Janet Yellen to chair the Federal Reserve after current Fed Chairman Ben Bernanke steps down in January.

Yellen is a former CEO of the Federal Reserve Bank of San Francisco and has served as vice chair of the Federal Reserve Board since 2010.

Obama had previously favored nominating former U.S. Treasury secretary Lawrence Summers to be the next Fed chairman, but Summers withdrew his nomination last month after it became apparent that several Democratic members of the Senate Banking Committee would oppose his nomination. That nomination in part reflected a lack of comfort with Summers' more "hawkish" approach to monetary stimulus than the approach favored by Bernanke and Yellen.

Any member of the Senate Banking Committee can block Yellen's nomination from reaching the Senate floor for a vote. One committee member who may put up significant opposition to Yellen's nomination is Richard Shelby (R., Ala.), who voted against confirming Yellen's as Fed vice chair in 2010.

A spokesperson for the senator said in an email exchange that "Sen. Shelby has real concerns about her proclivity to print more money and her record as a bank regulator, which has been found wanting. However, he believes that we should let the confirmation process play out, and looks forward to discussing her record at the upcoming hearing."

Yellen's nomination seemed to be an opportunity for Washington politicians to show some civility, while in the middle of a bitter battle over the federal budget and an even more important fight over raising the government's $16.7 trillion debt limit. Treasury Secretary Jack Lew has warned the government may run out of money to pay its bills -- including debt payments -- after Oct. 17. Some analysts have said the Treasury can probably make its payments until Oct. 31.

House Financial Services Committee Chairman Jeb Hensarling (R., Texas) in a statement late Tuesday said "I congratulate Dr. Yellen on her nomination. It is my hope that, if confirmed, she will lead the Federal Reserve to adopt a more transparent and rules-based monetary policy that aims for price stability and long-term growth."

Hensarling added that "Dr. Yellen has spoken favorably about such a rules-based policy in the past, saying it is what 'sensible central banks do.' Our committee would look forward to working with her to develop new tools that help the Fed communicate the course of its monetary policy using clear rules and become a sensible central bank."

Hensarling maintained a gracious tone in his comments about Ben Bernanke, with whom he has expressed significant disagreement: "I also want to commend Chairman Bernanke for his service to our country. During some of our economy's darkest days, he acted boldly, decisively, creatively -- very creatively, I might add. I have not always agreed with the policies he put forth, but there can be no doubt he is one of America's most devoted public servants and I wish him well."

During a press conference Wednesday afternoon, Obama called Yellen "one of the nation's foremost economists and policymakers," and said he had considered "many factors" in making his choice, including "an understanding of the Fed's dual mandate -- sound monetary policy to make sure we keep inflation in check, but also increasing employment and creating jobs, which remains our most important economic challenge."

"I've found these qualities in Janet Yellen," he said, adding that "she's exceptionally well qualified for this role. She's served in leadership positions at the Fed for more than a decade," and that she is "renowned for her good judgment." Obama also said "she understands the necessity of a stable financial system where we move ahead with the reforms we've begun."

The president also thanked Bernanke for "being such a strong partner in helping America recover from recession." Obama said that "against the volatility of global markets, he has been a voice of wisdom and a steady hand," and praised the outgoing Fed chairman's "tremendous courage and creativity," when "faced with potential global economic meltdown."

"With his commitment to greater transparency and clarity, he has also allowed us to better understand the Fed," the president said.

Yellen pledged, if confirmed by the Senate, "to promote maximum employment, stable prices and a strong and stable financial system."

"While we have made progress," in strengthening the economy, "we have farther to go," she said.

Obama said nothing about the budget crisis leading to the partial government shutdown, or the nasty debate over the federal debt limit, and didn't take questions from reporters.

Investors showed plenty of concern over the twin federal crises on Tuesday, when market yield on one-month Treasury bills more than doubled to 27 basis points, while the yield on three-month T-bills rose only slightly to a much lower 0.05%. On Wednesday afternoon the yield curve remained grossly inverted, with the market yield on one-month T-bills at 0.28%, while the yield on three-month T-bills was 0.05%.

Fifth Third Bancorp

Shares of Fifth Third Bancorp have returned 19% this year. The shares trade for 10.3 times the consensus 2014 EPS estimate of $1.72, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.92.

The higher consensus estimate for this year reflects the after-tax gain of $157 million, or 17 cents a share the company realized during the second quarter on shares of Vantiv ( VNTV). Fifth Third during the second quarter also realized an after-tax gain of roughly $49 million, or 5 cents a share, on the valuation of warrants it was holding in Vantiv, its former payment-processing subsidiary that was spun off in 2009.

Fifth Third is scheduled to announce its third-quarter results on Oct. 17, with analysts on average estimating net income of $367 million, or 42 cents a share, declining from 66 cents a share, the previous quarter, but increasing from 38 cents a year earlier. For more on what can be expected during third-quarter earnings season, please see TheStreet's earnings preview for regional banks.

FITB Chart FITB data by YCharts

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.

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-- 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 TheStreet.com 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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