• Wed. Sep 21st, 2022

20 banking stocks set to benefit most from rising interest rates as Federal Reserve fights inflation

ByElla E. Kidwell

Aug 17, 2022

When companies report financial results, analysts tend to make comparisons to the previous year’s quarter. But there are times when sequential improvements can be telling.

This is one of those times for small and medium banks.

Below is a screen that shows which US banks are expected to show the biggest improvement in interest rate spreads over the next four quarters.

‘Spread-lenders’

For an example of sequential improvement during the second quarter, Comerica Inc. CMA,
-1.20%
of Dallas reported a 23% increase in net interest income over the first quarter. A bank’s net interest income is its interest income minus the costs of deposits and borrowings.

It is the primary driver of earnings for most banks, except for those that focus more on capital markets activity, such as JPMorgan Chase & Co. JPM,
-1.17%,
Bank of America Corp. BAC,
-1.02%
and Citigroup Inc. C,
-0.95%.

According to Christopher McGratty, head of US banking research at Keefe, Bruyette & Woods, the capital markets earnings of the largest US banks are now “clearly in recession”.

During the second quarter, Comerica’s net interest margin (NIM) – the difference between the average rate it earns on loans and investments, and the average rate it pays on deposits and borrowings – increased by 55 basis points, from 2.19% to 2.74% in the first quarter.

Comerica attributed this to a change in its balance sheet, with deposits falling due to the bank’s interest rate management and “customers using balances to fund business activities”. The bank’s average cost for interest-bearing deposits was 5 basis points in the second quarter, in line with the first quarter.

Based on the limited information above, it looks like Comerica has plenty of cash ahead of the Federal Reserve’s series of short-term interest rate hikes and policy shift to allow its securities portfolio to begin. to run out, pushing bond and loan rates higher. .

In an interview, McGratty said he and the KBW research team had a preference for small- and mid-cap banks – “spread lenders”, he called them – because of “the strong loan growth and margin expansion”.

He made three other points:

  • Deposit costs have not increased significantly this year until the second quarter, but they will start to increase more rapidly in the second half of 2022.

  • “Assets are starting to revalue,” which means greater benefit to banks as commercial loans are rolled over; they tend to have relatively short maturities.

  • “The composition of the balance sheet is changing. Dollars come out of cash and go into loans. It’s a powerful remixing dynamic.

Going back to the biggest banks, here’s how their net interest margins changed during the second quarter:

Bank NIM – Q2, 2022 NIM – Q1, 2022 Margin increase

JPMorgan Chase & Co.

1.80%

1.67%

0.13%

Bank of America Corp.

1.86%

1.69%

0.17%

Citigroup Inc.

2.24%

2.05%

0.19%

Source: FactSet

Screen for banks

With net expansion in U.S. banks’ interest margin expected to be tempered through the end of 2022, it might be worth taking a closer look at consensus estimates to see which banks are expected to see their margins widen next. more over the next year.

Starting with the 109 banks in the Russell 3000 Index RUA,
-0.96%
for which net interest margin estimates are available from analysts surveyed by FactSet, here are the 10 for which net interest margins are expected to increase the most in the second quarter of 2023:

Bank Teleprinter Town Planned increase in NIM over one year East. NIM – Q2, 2023 East. NIM – Q1, 2023 East. NIM – 4th quarter 2022 East. NIM – Q3, 2022 NIM – Q2, 2022

Comedica Inc.

CMA,
-1.20%

dallas

1.00%

3.74%

3.74%

3.64%

3.41%

2.74%

M&T Bank Corp.

MTB,
-0.97%

Buffalo, New York

0.96%

3.97%

3.94%

3.90%

3.61%

3.01%

BancFirst Corp.

BANF,
-0.17%

Oklahoma City

0.75%

3.80%

3.84%

3.65%

3.41%

3.05%

Bancorp Inc.

TBBK,
-2.55%

Wilmington, Del.

0.70%

3.87%

3.81%

3.76%

3.51%

3.17%

WSFS Financial Corp.

WSFS,
-0.35%

Wilmington, Del.

0.69%

4.09%

4.13%

4.13%

3.87%

3.40%

Cullen/Frost Bankers Inc.

CFR,
-0.84%

San Antonio

0.62%

3.07%

3.04%

2.99%

2.81%

2.45%

Texas Capital Bancshares Inc.

TCBI,
-1.07%

dallas

0.62%

3.30%

3.30%

3.19%

3.01%

2.68%

Wintrust Financial Corp.

WTFC,
-0.94%

Rosemont, Ill.

0.60%

3.52%

3.51%

3.45%

3.26%

2.92%

Zions Bancorporation, North America

IF WE,
-0.07%

Salt Lake City

0.60%

3.47%

3.44%

3.39%

3.20%

2.87%

First financial bank.

CBFF,
-0.97%

Cincinnati

0.59%

4.02%

4.08%

4.01%

3.86%

3.43%

East West Bancorp., Inc.

EWBC,
-1.52%

Pasadena, California.

0.59%

3.82%

3.83%

3.80%

3.59%

3.23%

Regions Financial Corp.

RF,
-1.62%

Birmingham, Alabama.

0.51%

3.57%

3.55%

3.47%

3.34%

3.06%

Hancock Whitney Corp.

HWC,
-1.36%

Gulfport, miss.

0.50%

3.54%

3.54%

3.50%

3.41%

3.04%

National Bank Class A Securities Corp.

CSNB,
-1.63%

Greenwood Village, Colo.

0.49%

3.79%

3.79%

3.73%

3.56%

3.30%

Seacoast Banking Corp. from Florida

SBCF,
-2.06%

Stuart, Florida.

0.48%

3.86%

3.84%

3.68%

3.57%

3.38%

PNC Financial Services Group Inc.

cabin crew,
-1.10%

Pittsburgh

0.48%

2.98%

2.96%

2.93%

2.79%

2.50%

Fifth Third Bancorp

FITB,
-1.30%

Cincinnati

0.47%

3.39%

3.38%

3.38%

3.20%

2.92%

Westamerica Bancorporation

WABC,
-1.06%

San Rafael, California.

0.47%

3.21%

3.18%

3.09%

2.95%

2.74%

Wells Fargo & Co.

WFC,
-0.27%

San Francisco

0.47%

2.86%

2.84%

2.78%

2.63%

2.39%

ETF Corp.

ETFs,
-0.89%

Pittsburgh

0.47%

3.23%

3.18%

3.15%

3.02%

2.76%

You can see expected margin expansion running out of steam in the first half of 2023. But these banks look set for a great run of quarters, especially if McGratty’s “pretty constructive outlook” for the U.S. economy as the Fed continues its measures to combat inflation continue. true.

Click on the tickers to learn more about each bank. You should also read Tomi Kilgore’s in-depth guide to the Wealth of Free Information on the MarketWatch quotes page.