- Regional banks are eagerly awaiting a Fed rate hike so they can get a better yield on loans
- Texas banks and banks with big credit card portfolios will get relief
- There is even a big, big bank that will benefit
By the time you read this the Federal Reserve may have decided to raise short term interest rates. Or, It may have decided to wait. Regardless, it seems the Fed will raise rates eventually, and one group of people are awaiting that day eagerly.
Bankers Await A Rate Hike.
U.S. bankers have been suffering with zero percent interest rates ever since the financial crisis. They have met the challenge by hiking fees – try finding a free checking account. Savings accounts get almost no yield. And still earnings remain challenged. Government money is free, but that also means you can’t get much for a loan.
Once the Fed starts hiking rates, this changes. Banks will be paying for money, and they can charge businesses and consumers more for it.
This means that regional banks, banks that do actual commercial banking as opposed to managing investments, are due for a break-out as rates rise. These include names like SunTrust (NYSE:STI) in my home town of Atlanta, currently selling at a Price/Earnings ratio of 11.6, and still priced at 10% below the peak it reached before the recent market correction.
Credit Card Banks Look Good
Banks that are big in credit cards should also get relief from higher rates. Capital One Financial (NYSE:COF), for instance, is presently selling at a P/E below 11. The company advertises its credit cards extensively with the tag line “what’s in your wallet.” American Express (NYSE:AXP), which has been down ever since Costco (NASDAQ:COST) announced it would stop using its credit cards, could stage a comeback, especially since it now has a similar deal with WalMart’s (NYSE:WMT) Sams Club warehouse stores.
There are banks in Texas that have been badly beaten down by the oil crash, which will benefit greatly from both higher interest rates and higher oil prices. Prosperity Bank (NYSE:PB) of Texas, currently selling at a P/E under 12, fits this description -- many of its offices are located on the Eagle Ford Shale play.
Wells Fargo a Safe Choice
Among the biggest banks, the performance of Wells Fargo (NYSE:WFC) has lagged this year, mainly because it focuses on things like mortgage loans, credit cards and branch banking. Yet it has an extremely strong balance sheet, its management is highly respected, it is as safe as houses, and right now it’s selling for a P/E of just 13. (I happen to own some – it has been one of the best performers in my personal portfolio going back almost five years.) The stock even pays a dividend, presently yielding 2.79%.
The point is you don’t have to go out on a limb to find companies that will benefit enormously from a hike in interest rates. There is probably an office for one in your home town.