As expected, the Federal Reserve announced the first rate hike of 2017. The benchmark federal funds rate was hiked to 0.75–1.0% from 0.50–0.75% raised in Dec 2016. Notably, this is the third raise in interest rates since the 2008 financial crisis, which led the Fed to lower rates to near zero.
Following this announcement, several major banks, including Wells Fargo & Company WFC, The PNC Financial Services Group, Inc. PNC, Citigroup Inc. C, The Bank of New York Mellon Corporation BK, BB&T Corporation BBT, KeyCorp KEY and U.S. Bancorp USB, increased their prime lending rate to 4.00%, effective Mar 16, 2017.
Banks are the biggest beneficiaries from higher interest rates. The steeper yield curve will ease margin pressure, thus leading to a rise in interest income for banks. This will enhance banks’ profitability.
While market had factored in the rate hike, the announcement led the equity markets to move higher. All the three major indexes ended the day in green.
Notably, the Fed stuck to its projections for number of rate hikes this year, with two more raises anticipated to be announced in June and December. Also, the Fed affirmed three hikes for 2018, while moving the rates toward 3% for the long term.
As the central bank put it in a statement, “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” So, for those who were expecting a more hawkish stance, this was a bit disappointing.
Nonetheless, the Fed’s projections did not consider President Donald Trump's proposed infrastructure spending plans, tax cuts and reduced regulations for banks, which are likely to spur further economic growth. This will again benefit banks as they are mainly dependent on the nation’s economy for improved profitability.
All in all, gradual rise in interest rates and an improved economy will boost financial performance of the banks.
Of the above-mentioned stocks, U.S. Bancorp currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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BB&T Corporation (BBT): Free Stock Analysis Report
PNC Financial Services Group, Inc. (The) (PNC): Free Stock Analysis Report
U.S. Bancorp (USB): Free Stock Analysis Report
KeyCorp (KEY): Free Stock Analysis Report
Bank Of New York Mellon Corporation (The) (BK): Free Stock Analysis Report
Wells Fargo & Company (WFC): Free Stock Analysis Report
Citigroup Inc. (C): Free Stock Analysis Report
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