6 Regional Bank Stocks To Buy As Rate Hike Prospects Rise

The timing of the next rate hike has become a topic of contention ever since the Federal Reserve hiked the same for the first time in almost a decade last December. Every time there is a scheduled FOMC meeting or the Fed policy meeting minutes are released, investors start searching for indications for the next rise in the rates.

Following the release of the Fed's July policy meeting minutes on Wednesday, the chances of another rate hike in the near term seems to be high. Per the minutes, “A few participants pointed out that various benchmarks for assessing the appropriate stance of monetary policy supported taking another step in removing policy accommodation.”

The specific timeline for the rate hike was not provided. Notably, the next FOMC meeting is scheduled for Sep 20–21.

Apart from this, the latest comments from two Fed officials – the New York Fed President William Dudley and the Atlanta Fed President Dennis Lockhart – indicate that officials remain in favor of a rate hike in the near term. While William Dudley’s comments reflected the hike is quite possible next month, Dennis Lockhart indicated that there is a high chance of one rate hike later this year.

All these have increased the speculations for proposed rise in rates by the end of this year.

Banks Thrive in Rising Rate Environment

Banks have been facing the adverse impact of prolonged low interest rate environment. This has significantly affected their primary source of revenues.

Banks derive benefits from a steep yield curve (wide spread between short and long terms rates). A rise in short-term rates (to which deposits are tied) will help the banks in charging more on loans (to which long-term rates are tied), if the long-term rates is higher than the short-term ones. Hence, banks benefit from rising interest rates only if the increase in long-term rates is higher than the short-term ones.

Though the Dec 2015 rate hike helped the banks in improving their top-line growth to some extent, a further increase should ease the pressure on net interest margin. Further, as higher rates indicate strengthening of the economy, there is a possibility of a rise in demand for loans and subsequent growth in net interest income (NII).

So, with the doors open for a rate hike in the near-term, investors should make wise investment decision by investing in bank stocks.

How to Pick Bank Stocks?

It’s very difficult to choose from the vast universe of banking stocks. So we have taken the help of the Zacks Stock Screener to shortlist stocks that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Also, interest income form a substantial part of their revenues and therefore, these are well positioned to gain from a rate hike.

To further narrow down the list, we added market capitalization of more than $2 billion and long-term growth rate of over 5%.

Here are six bank stocks that meet the above-mentioned criteria:

Hancock Holding Co. (NASDAQ:HBHC) is a bank holding as well as financial holding company, providing a variety of transaction and savings deposit products, treasury management services, investment brokerage services, secured and unsecured loan products. This Southeast bank derives over 70% of its revenue through NII.

According to the company’s latest quarterly filing, a 100-basis-point increase in rates will lead to 2.2% rise in NII on an annualized basis.

Zacks Rank: #1
Long-term Growth Rate: 8%
Market Cap: $2.4 billion

Comerica Inc. (NYSE:CMA) is a banking and financial services company offering financial services in three primary geographic markets – Texas, California, Michigan, as well as Arizona and Florida. This major regional bank generates nearly 60% of its revenue through NII.

Notably, according to the company’s latest quarterly filing, NII should increase in a rising rate scenario due to an increase in yields on earning assets. The company projects that a 200-basis-point increase in rates will lead to 11% rise in NII on an annualized basis.

Zacks Rank: #2
Long-term Growth Rate: 5.4%
Market Cap: $7.9 billion

UMB Financial Corp. (NASDAQ:UMBF) is a financial services holding company engaged in providing complete banking, asset management, health spending solutions and related financial services. This Midwest banking company derives nearly 50% of its revenue through NII.

Notably, according to the company’s latest quarterly filing, a 100-basis-point increase in rates will add $3.7 million to its NII.

Zacks Rank: #2
Long-term Growth Rate: 18.3%
Market Cap: $2.9 billion

Wintrust Financial Corp. (NASDAQ:WTFC) is a bank holding company which provides banking services, trust and investment services, commercial insurance premium financing, short-term accounts receivable financing, and certain administrative services. This Midwest banking company derives over 65% of its revenue through NII.

Notably, according to the company’s latest quarterly filing, a 100-basis-point increase in rates will raise its NII by 3.5%.

Zacks Rank: #2
Long-term Growth Rate: 13.5%
Market Cap: $2.8 billion

MB Financial Inc. (NASDAQ:MBFI) is a bank holding company for MB Financial Bank, N.A. that provides financial services to small and middle market businesses, and individuals in the U.S. This Northeast bank derives over 55% of its revenue through NII.

Notably, according to the company’s latest quarterly filing, a 100-basis-point increase in rates will increase its NII by 2.9%.

Zacks Rank: #2
Long-term Growth Rate: 10.5%
Market Cap: $2.9 billion

First Republic Bank (NYSE:FRC) is a commercial bank and trust company, providing personalized, relationship-based preferred banking, preferred business banking, real-estate lending, trust and wealth management services to customers in metropolitan areas across the U.S. This Western bank derives nearly 80% of its revenue through NII.

Notably, according to the company’s latest quarterly filing, a 100-basis-point immediate increase in rates will lead to 5% rise in its NII.

Zacks Rank: #2
Long-term Growth Rate: 15.1%
Market Cap: $10.7 billion