4 Bank Stocks To Buy On Yellen's Rate Hike Signal

Rate hike continues to be a topic of much disputation ever since the Federal Reserve hiked the interest rate for the first time in almost a decade last December. As each Fed meeting approaches, the dollar is seen to strengthen, mortgage rates move up and gold falls, only to be later disappointed by the Fed’s cautious stance.

However, this time things look quite optimistic. Fed Chair Janet Yellen, in her most recent speech at Harvard University, seemed ready to strike while the iron is hot.

“It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” Yellen said during a panel discussion at the hallowed university.  In support of the hike Yellen also said, “Growth looks to be picking up from the various data we monitor.”

Her comments open the door for a possible rate hike at the Fed’s next policy meeting during Jun 14-15 or at its gatherings in July or September. The confidence comes on the heels of improving consumer spending, labor markets, housing-market activity, retail sales and industrial production.

Moreover, the modest growth of the U.S. economy in the first quarter reflected its resilience to financial market volatility and a global slowdown. The majority of policy makers are in favor of increasing interest rates as early as June, if economic data continues to be strong.

Therefore, it seems to be the perfect time to keep a tab on stocks that would benefit from an interest rate hike. An interest rate hike will ease some of the pressure on net interest margin (NIM) – a key source of banks’ earnings.

Also, banks will earn more from the money that they need to keep at the Fed compared with almost no income from this source in a near-zero rate environment that has prevailed since the last financial meltdown. Moreover, a rising interest rate sends signals of healthy economic growth, which can only mean lesser non-performing assets for the banks.

4 Banking Stocks to Bet On

With the help of the Zacks Stock Screener, we have shortlisted 4 stocks in the banking industry that sport a Zacks Rank #1 (Strong Buy) or #2 (Buy). Interest income form a substantial part of their revenues and therefore, these are well positioned to gain from a rate hike.

UMB Financial Corp. (UMBF - Snapshot Report) is a financial services holding company engaged in providing complete banking, asset management, health spending solutions and related financial services to commercial, institutional and personal customers nationwide. This Zacks Rank #2 company generates at least 40% of its revenue through net interest income (NII).

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