Bank investors watch Fed with bated breath

21 September, 2015 (13:00) | Blog | By: admin

By Kaja Whitehouse, USA TODAY

The Federal Reserve could raise interest rates for the first time in almost 10 years on Thursday. How will investors – and stocks – react? Adam Shell for USA TODAY.

Two groups that will be watching the Federal Reserve with especially close attention this week are the nation’s lenders and their investors — both of whom have been waiting with bated breath for higher interest rates to turbocharge sagging loan profits.

“This is the first time since I’ve covered banks that everyone has wanted rates to go up because it will be beneficial to the bottom-line,” says hedge fund manager Fred Cummings, who has been investing in bank stocks for 26 years. “Historically, when rates go up, it’s a negative,” says Cummings, portfolio manager at Elizabeth Park Capital Management, a $284 million fund that focuses on bank stocks.

The Fed’s highly anticipated two-day policy meeting to discuss interest rates kicks off Wednesday.

Cummings and other experts predict that Fed officials will likely hold off on raising rates at the September meeting due to concerns about China’s economic slowdown. Still, they expect the Fed to push rates higher over the coming months, which could greatly benefit the banking industry — especially lenders that are heavily invested in short-term and variable-rate loans.

Large banks, such as JPMorgan Chase (JPM) and Bank of America (BAC), will be among the biggest beneficiaries of rising rates due to their large credit cards and home-equity loan portfolios, says Chris Mutascio, a banking analyst with Wall Street firm Keefe Bruyette & Woods. But regional banks could also benefit, especially those that are heavily invested in shorter-term commercial loans, experts say.

Commercial loans, or loans to help businesses fund their operations, tend to reflect changes in interest rates more quickly than mortgages, says Cummings. He says most commercial loans will reflect higher interest rates within 12 months — versus three to five years for most real-estate loans.

The regional banks that Cummings sees benefiting most are Fifth Third Bank (FITB), SunTrust (STI), Zion Bancorp (ZION), Comerica (CMA) and Preferred Bank (PFBC). KBW’s Mutascio points to KeyCorp (KEY) and PNC (PNC) for similar reasons.

“KeyCorp and PNC Financial Services are two names that are highly levered positively to rising interest rates. And the reason for that is their loan portfolios are more heavily commercial driven,” he says.

Of course, even if the Fed raises rates this week, a single increase of 25 basis points over a year’s time would do little to boost banks’ loan profits. Banks would benefit most from “gradual and consistent rate increases,” Mutascio says. And that is what the Fed has signaled it will do.

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