3 Bank Stocks Ready To Continue Their Winning Streak In 2019

The banking industry seems to have been benefiting the most from the interest rate hikes this year. The year 2018 has seen four Fed rate hikes so far, the latest one being announced last week. Moreover, this is the ninth rate hike since December 2015.

Notably, banks derive benefits from a steep yield curve i.e. when long-term rates are greater than short-term rates. This is because, when short-term rates rise (to which deposits are tied), banks can charge more on loans (to which long-term rates are tied) if long-term rates are higher than short-term ones.

This helps in expanding net interest income, as well as net interest margins, for banks. Moreover, rising rates reflect an improving domestic economy as it implies that the credit quality is improving, which is beneficial for banks' profitability.

Therefore, while the recent inversion of the yield curve, which is also perceived as an early indication of an impending recession, might temporarily be bad news for banks, the banking industry as a whole is expected to still benefit from these rate hikes going into 2019, given that the Fed now plans two hikes next year as opposed to three.

In addition to this, the Tax Cut & Jobs Act, which helped banks improve their corporate earnings in 2018, is expected to aid earnings growth in the coming few quarters.

Further, given the expectation for potential lesser regulations, banks are expected to gain in the future. If the central bank’s latest proposal to significantly raise the threshold for SIFI to $250 billion in assets from the current $50 billion gets implemented, compliance costs will come down and banks will be able to utilize the freed-up capital to generate more revenues.

Additionally, the steps toward easing regulations related to the Volcker Rule are positive for banks as it will no longer prohibit them from conducting proprietary trading.

Thus, while the uncertainty related to the U.S.-China trade war and other global issues might have a negative impact on the overall finance sector in 2019, bank stocks are expected to continue to benefit from the rise in rates as well as potential lesser regulations.

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