Banks Look Forward to Federal Reserve Tapering

NEW YORK (TheStreet) -- Banks expect to benefit from the Federal Reserve's steps to taper bond purchases, though their stocks might not move much higher on the news.

The Federal Open Market Committee will have its policy meeting on Tuesday and Wednesday this week, where it will debate whether the central bank should pull back its massive quantitative easing program that has helped keep long-term interest rates extraordinarily low since 2009.

The timing of the taper is uncertain and depends upon whether the Fed determines the economy is strong enough to begin withdrawing stimulus. The FOMC will be looking at factors such as job growth and unemployment levels, economic growth and inflation.

Irrespective of when the Fed tapers, the move would be welcomed by banks. At a recent Goldman Sachs conference, bank managements were positive about the impact of tapering.

For one, the Fed has said it will taper only if it is convinced the economy is healing and growing, which means banks could finally see opportunities for loan and revenue growth.

Secondly, there is room for an expansion in net interest margins -- the difference between interest earned on loans and other assets and the interest paid on deposits and borrowings. But the upside here is limited so long as the federal funds rate remains in a target range of zero to 0.25%.  The market expects short-term rates to stay depressed until at least 2015.

Still, according to a Goldman Sachs roundup of comments, PNC Financial Services Group (PNC) noted that tapering will "bring some degree of certainty back to the corporate sector again", driving loan growth.

Morgan Stanley (MS) said tapering would coincide with a "healthy" pickup in rate volatility, which would benefit its fixed- income trading business.

JPMorgan (JPM) and Wells Fargo (WFC) said more broadly that tapering would be a sign that the economy is normalizing.

But investors should not rush to bid up all financial stocks.

"Movements in interest rates will not be uniformly good or bad for financial companies' earnings and stock prices, and the effect will vary by sector," Bank of America Merrill Lynch pointed out in a recent note.

Plus valuations in the financials sector are no longer cheap, so tapering is unlikely to trigger a substantial rerating in stocks.

That might only come when short-term rates rise.

-- Written by Shanthi Bharatwaj in New York.

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

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