Investors are hiding in US regional banks while Fed increases are looming. Written by Reuters

By David Randall

NEW YORK (Reuters) – Expectations of rising interest rates are boosting regional bank stocks as falling technology stocks force investors to look for assets that could thrive amid higher returns and tighter Federal Reserve policies.

The SPDR S&P Regional Banking (NYSE 🙂 ETF rose 2% on Friday afternoon from the beginning of the year to date, compared to a decline of 6.6% for. The rise in shares of individual banks was even more attractive: shares of Citizens Financial (NYSE 🙂 Group Inc rose 8.4% for the year to date, while shares of KeyCorp (NYSE 🙂 rose nearly 9%.

Regional banks generate a large portion of their income from net interest margins, increasing their attractiveness as investors increasingly expect the Fed to raise interest rates more aggressively this year to control inflation. The central bank is meeting next week and is expected to raise interest rates as early as March. [L4N2TZ0GW][L4N2TQ2J1]

Yields on treasury bonds rose in anticipation of tighter policies, with those on the reference 10-year treasury by 40 basis points compared to recent lows.

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

“If you want to play the yield curve on a steep slope, then the best way is to do it through regional banks,” said Moustapha Mounah, assistant portfolio manager at James Investment, who has increased his stake in companies such as SVB Financial Group.

While investors expect regional banks to generally benefit from rate increases, the pace at which the Fed is tightening monetary policy could be crucial. A steep path of rate increases could harm economic growth and ultimately affect banks’ earnings, Mounah said, although such an outcome is not his primary forecast.

Fed fund futures traders are fully setting prices up 25 basis points in March, with three more rate increases by the end of the year.

With the Fed meeting next week ending on Wednesday, investors are waiting for earnings from Zions Bancorp, which is expected to announce its last quarterly results on Monday, followed by The first Bancorp (NASDAQ 🙂 on Tuesday and United Bankshares (NASDAQ 🙂 Inc and Merchants Bancorp (NASDAQ 🙂 on Wednesday.

The rate of increase in Federal Reserve interest rates will directly affect revenue in the sector, said Gary Tenner, an analyst at DA Davidson & Co. Tenner recently added two more expected 25-point rate increases to his regional bank valuation models, bringing the total to four by the end of 2023, he said.

“The impact of higher interest rates is potentially more positive on 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 have grown 0.4% so far in 2022.

In addition to the rapid rate of interest rate hikes, regional bank stocks could suffer if the sell-off of stocks that have already pushed Nasdaq into correction territory accelerates further, raising expectations that the Fed will raise rates at a slower pace to avoid market destabilization. [L1N2TZ2JG]

“There’s still a debate about the stock price about how much the Fed will raise and how fast. If the Fed gives up, then the growth we’ve seen here could slow,” said Steve Comery, a research analyst at GAMCO Investors. [L1N2TZ2JG]

Brady Gailey, CEO at Keefe, Bruyette & Woods, believes that even two or three rate increases would be enough for the sector to achieve above-market earnings growth as credit growth accelerates. In September, it improved the regional banking sector to overweight.

“They should be big users of higher rates, but there are other foundations on which the sector is also going in favor,” he said.