5 Bank Stocks To Buy As Interest Rate Hike Hopes Rekindle

After the Federal Reserve signaled a likely rate hike by the end of this year, hopes were renewed among investors targeting bank stocks. The Fed announced that it would raise the interest rates four more times by the end of next year. This came as a sweet surprise for investors, as they were not expecting any update on rate hike this time around.

The news led to an increase in SPDR S&P Regional Banking ETF (CO:KRE) by 1.6% in the past two days as against a 0.2% decline recorded by the S&P 500 index.

As the current inflation rate remains below the Fed’s target level, chances of an interest rate hike were low this time around among market participants. However, investors were waiting for another important decision that is likely to significantly benefit banks.

Putting all speculation to rest, the Fed finally announced that it will begin reducing its balance sheet starting next month. The Fed’s balance sheet stands currently at a staggering $4.5 trillion, thanks to its efforts to increase liquidity by large-scale purchases of assets during the last financial crisis. The decision to unwind was the result of months of vigilant research and hard work put in by the central bank to tighten the monetary policy.

Fed Chair, Janet Yellen, said in the meeting that the economy was strong enough to survive further rate increases and the reduction in the balance sheet.

Why Are Banks Likely to Profit?

Anticipation of Rate Hike: Banks typically benefit from rising interest rates. The benefit primarily comes from a steep yield curve, i.e. when the spread between long-term and short-term rates is wide. Deposits usually carry short-term rates while loans are often tied to long-term rates.

Accordingly, a rise in rates enables banks to charge more for loans, leading to an increase in their spread income. Also, rising rates reflect an improving domestic economy that boosts banking business.

Downsizing of Balance Sheet: Balance sheet reduction is also going to profit banks. That’s because if the Fed decides to buy back some or all short-term duration securities, the yield curve will be steeper. This means that the yield on long-term bonds will increase. This will also lead to improved margin spreads for banks.

Choosing the Winning Stocks

While the Fed’s moves will likely benefit the entire banking sector, stocks that been witnessing positive earnings estimate revisions and carry a favorable Zacks Rank should generate solid returns.

BancFirst Corporation (NASDAQ:BANF) carries a Zacks Rank #1 (Strong Buy). The company has witnessed an upward earnings estimate revision of 1.1% for the current year, in the last 60 days. Shares of this bank have witnessed growth of approximately 3% in the past two days. You can see the complete list of today’s Zacks #1 Rank stocks here.

State Street Corporation (NYSE:STT) has witnessed a 3.6% upward revision in earnings estimates for the current year, in the last 60 days. It currently sports a Zacks Rank of #2 (Buy). The company’s share price increased marginally in the past two days.

Wintrust Financial Corporation (NASDAQ:WTFC) also carries a Zacks Rank of #2. The company’s Zacks Consensus Estimate has been revised 1% upward for the current year, in the last 60 days. The stock has gained 1.4% in the past two days.

SunTrust Banks, Inc. (NYSE:STI) has witnessed upward earnings estimate revision of 0.8% for the current year, in the last 60 days. Its share price increased 1.7% in the past two days and it currently carries a Zacks Rank of #2.

The PNC Financial Services Group, Inc. (NYSE:PNC) has witnessed an upward earnings estimate revision of 0.5% for the current year, in the last 60 days. It currently sports a Zacks Rank of #2. The company’s share price increased 1.6% in the past two days.

5 Trades Could Profit "Big-League" from Trump Policies

If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.

Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure.

See these buy recommendations now >>

PNC Financial Services Group, Inc. (The) (PNC): Free Stock Analysis Report

SunTrust Banks, Inc. (STI): Free Stock Analysis Report

State Street Corporation (STT): Free Stock Analysis Report

Wintrust Financial Corporation (WTFC): Free Stock Analysis Report

BancFirst Corporation (BANF): Free Stock Analysis Report

SPDR-KBW REG BK (KRE): ETF Research Reports

Original post

Zacks Investment Research