By David Randall
NEW YORK (Reuters) – Expectations of rising interest rates are boosting shares in regional banks as declines in technology stocks push investors to look for assets that can move forward between higher yields and a tight Federal Reserve policy.
The SPDR S&P Regional Banking (NYSE 🙂 ETF was up 2% year-on-year on Friday evening, down 6.6%. The gains on some individual stocks were even more striking: Citizens Financial (NYSE 🙂 Group Inc shares rose 8.4% year-on-year, and KeyCorp (NYSE 🙂 shares rose nearly 9%.
Regional banks derive much of their revenue from net interest margins, and increase their attractiveness as investors expect the Fed to raise interest rates more aggressively this year to control inflation. The central bank will meet next week and interest rates are expected to rise as soon as March. [L4N2TZ0GW][L4N2TQ2J1]
Treasury yields have risen in anticipation of a tighter policy, and 10-year Treasury benchmarks have risen 40 basis points from the last few minutes.
At the same time, some investors expect the U.S. economy to expand and a reduced fiscal stimulus to boost lending growth, with regional banks helping to achieve a 70.1% increase in profits in 2021, the seventh of 126 sub-sectors of the S&P 500. Goldman Sachs (NYSE :).
“If you want to play the rising yield curve, the best way to do that is through regional banks,” said Moustapha Mounah, an assistant portfolio manager at James Investment, which is increasing its stake in companies like SVB Financial Group.
While investors expect regional banks to take advantage of rate hikes, the pace at which the Fed tightens monetary policy could be key. Too much of a rate hike could hurt economic growth and ultimately have a weight on bank profits, Mounah said, although that result is not his basic prediction.
Future Fed fund traders are pushing up prices by 25 basis points in March, in addition to a three-year rate hike by the end of the year.
In addition to next week’s Fed meeting, which ends on Wednesday, investors are looking forward to Zions Bancorp’s earnings, which will release its final quarterly results on Monday, after which. First Bancorp (NASDAQ 🙂 on Tuesday and United Nations shares (NASDAQ 🙂 Inc. and Merchants Bancorp (NASDAQ 🙂 on Wednesday.
Gary Tenner DA Davidson & Co. said the pace of the Federal Reserve’s rate hike will have a direct impact on sector revenue. Tenner’s analysts recently added a 25 basis point rate hike to the regional banks ’valuation models, and their valuation models. a total of four by the end of 2023, he said.
“The impact of higher interest rates is potentially more positive for regional banks’ estimates and returns ”than so-called universal banks, which also have revenues from the investment bank, he said. S&P 500 banks have grown 0.4% so far in 2022.
In addition to the rapid pace of rate hikes, regional bank shares may suffer if the Nasdaq boosted stock sales to the correction territory further accelerated, raising expectations that the Fed will raise rates at a slower pace to destabilize markets. [L1N2TZ2JG]
“This debate over how much the Fed will go up and how fast it will go up is still in the stock price. If the Fed goes back, the rally we are seeing here could slow down,” said Steve Comery, a research analyst at GAMCO Investors. [L1N2TZ2JG]
Brady Gailey, managing director of Keefe, Bruyette & Woods, believes that even two or three increases would be enough for the sector to grow in market profitability as loan growth accelerates. The regional banking sector gained weight in September.
“They will be a big beneficiary of higher rates, but the sector also has other bases,” he said.