Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Investors shelter in U.S. regional banks as Fed hikes loom

EconomyJan 23, 2022 09:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 6, 2022. REUTERS/Brendan McDermid

By David Randall

NEW YORK (Reuters) -Expectations of rising interest rates are bolstering the shares of regional banks, as a tumble in technology stocks pushes investors to search for assets that could thrive amid higher yields and tighter Federal Reserve policy.

The SPDR S&P Regional Banking (NYSE:KRE) ETF was up 2% year-to-date on Friday afternoon, compared to a 6.6% decline for the S&P 500. Gains in some individual bank stocks have been even more eye-catching: Shares of Citizens Financial (NYSE:CFG) Group Inc are up 8.4% for the year to date, while shares of KeyCorp (NYSE:KEY) are up nearly 9%.

Regional banks make a hefty chunk of their revenues from net interest margins, boosting their appeal as investors increasingly expect the Fed to hike interest rates more aggressively this year to control inflation. The central bank meets next week and is expected to raise interest rates as soon as March. [L4N2TZ0GW][L4N2TQ2J1]

Treasury yields have risen in anticipation of tighter policy, with those on the benchmark 10-year Treasury up 40 basis points from recent lows.

At the same time, some investors expect the expanding U.S. economy and reduced fiscal stimulus to boost loan growth, helping regional banks post full-year 2021 earnings growth of 70.1%, the seventh-fastest among the 126 subsectors in the S&P 500, according to Goldman Sachs (NYSE:GS).

"If you want to play the yield curve steepening, then the best way to do that is through regional banks," said Moustapha Mounah, assistant portfolio manager at James Investment, who has been increasing his stake in companies such as SVB Financial Group.

Though investors expect regional banks broadly to benefit from rate increases, the pace at which the Fed tightens monetary policy could be key. A too-steep trajectory of rate increases may hurt economic growth and eventually weigh on bank earnings, Mounah said, though such an outcome is not his base forecast.

Fed funds futures traders are fully pricing in a 25 basis point hike in March, in addition to three more rate increases by year-end.

In addition to next week’s Fed meeting which concludes on Wednesday, investors await earnings from Zions Bancorp, which is expected to release its latest quarterly results Monday, followed by First Bancorp (NASDAQ:FBNC) on Tuesday and United Bankshares (NASDAQ:UBSI) Inc and Merchants Bancorp (NASDAQ:MBIN) on Wednesday.

The pace of the Federal Reserve's rate hikes will directly affect revenues in the sector, said Gary Tenner, an analyst at D.A. Davidson & Co. Tenner recently added two more expected rate hikes of 25 basis points to his valuation models for regional banks, bringing his total to four through the end of 2023, he said.

"The impact of higher interest rates is potentially more positive for estimates and returns for regional banks" than so-called universal banks, which also have income from investment banking, he said. Banks in the S&P 500 are up 0.4% so far in 2022.

Besides a too-quick pace of rate hikes, regional bank shares could suffer if a stock selloff that has already pushed the Nasdaq into correction territory accelerates further, raising expectations that the Fed will raise rates at a slower pace to avoid destabilizing markets. [L1N2TZ2JG]

"There's still this debate in the share price about how much the Fed is going to raise and how fast. If the Fed backpedals then the rally we've been seeing here may slow," said Steve Comery, a research analyst at GAMCO Investors. [L1N2TZ2JG]

Brady Gailey, managing director at Keefe, Bruyette & Woods, believes even two or three rate hikes would be enough for the sector to post above-market earnings growth as loan growth accelerates. He upgraded the regional bank sector to overweight in September.

"They are set to be a big beneficiary of higher rates, but there are other fundamentals that the sector has going for it, too," he said.

Investors shelter in U.S. regional banks as Fed hikes loom
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (4)
Alpha Omega
Alpha Omega Jan 23, 2022 1:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Money out of technology weakens market internals ans precipitates bigger drop. Short is better than long this time.
Aleksandr Radchenko
Aleksandr Radchenko Jan 23, 2022 12:07PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
who are these people who buy bank shares before the start of the digital dollar? the digital dollar will make banks a vestige.
taylor jason
taylor jason Jan 23, 2022 11:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
"if you want to play the yield curve steeping..." curve is flattening. only a 20bps difference between 10 and 30 year treasury
jason xx
jason xx Jan 23, 2022 11:17AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The FED is not supposed to be concerned with stabilizing markets they are supposed to stabilize inflation. Rates should have been raised 6 months ago imo
taylor jason
taylor jason Jan 23, 2022 11:17AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
that's exactly what the fed is doing by becoming more hawkish
Bill Bill
Bill Bill Jan 23, 2022 11:17AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
All they are concerned with is market function. Doesn’t matter what they say.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email