By Manya Saini and Chibuike Oguh
(Reuters) -Shares of U.S. banks rose on Tuesday after a smaller-than-expected rise in inflation data indicated that the Federal Reserve is likely to keep interest rates unchanged this week, while Wells Fargo (NYSE:WFC)'s net interest income outlook also boosted investor optimism on the sector.
U.S. consumer prices barely rose in May and the annual increase in inflation was the smallest in more than two years, though underlying price pressures remained strong, Labor Department data showed on Tuesday.
Traders were also buoyed by positive comments from Wells Fargo's Chief Financial Officer Mike Santomassimo, who said during a conference on Tuesday that the lender, one of the largest U.S. banks, still expects to see a bump in net interest income later this year.
The Wells Fargo executive's comments are in contrast to some of the guidance on net interest income coming out of regional banks for the second half of the year, said Jack Janasiewicz, portfolio manager at Natixis Investment Managers.
"I think that puts a floor for some of the larger (banks) that are seeing stable outlooks for margins going forward," he added.
The S&P 500 Banks Index rose 1.14%, while the KBW Regional Banking Index gained about 2%. The S&P 500 Banks Index is up 5.4% this month, through Monday's close.
JPMorgan Chase (NYSE:JPM), Wells Fargo, Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and Bank of America (NYSE:BAC) advanced between 1% and 2%.
Higher net interest income has helped cushion a slump in the banking sector's market-sensitive business units such as investment banking and trading.
Regional lenders rose after Comerica (NYSE:CMA) Inc announced on Tuesday that it was planning to exit mortgage banker finance business by the end of the year to improve its financial stability.
Comerica was up 4.4%, while its peers PacWest Bancorp, Western Alliance (NYSE:WAL), U.S. Bancorp, Valley National Bancorp (NASDAQ:VLY) and KeyCorp (NYSE:KEY) gained between 0.1% and 5%. Zions Bancorporation (NASDAQ:ZION) shares fell 0.56% after its executives forecasted a slowdown in net interest income.