As Fed hikes arrive, Wall Street Week Ahead Investors have shelter in US regional banks

As Fed hikes arrive, Wall Street Week Ahead Investors have shelter in US regional banks ...

NEW YORK, January 21 - Expectations of rising interest rates are strengthening regional banks, as a drop in technology stocks pushes investors to seek out assets that may thrive amid higher yields and stricter Federal Reserve policy.

The SPDR S&P Regional Banking ETF was up 2% year-to-date on Friday afternoon, compared to a 4.6 percent decline for the S&P 500.

Regional banks contribute a large portion of their revenues from net interest margins, boosting their appeal as investors anticipate the Fed to increase interest rates more aggressively this year to combat inflation.

Treasury yields have risen as a result of a stronger policy, with those on the benchmark 10-year Treasury up 40 basis points from recent lows.

According to Goldman Sachs, some investors believe the increased economy and reduced fiscal stimulus will aid loan growth in the United States, boosting regional banks' full-year earnings growth by 70.1%, the seventh-fastest among the 126 subsectors in the S&P 500.

"If you want to play the yield curve steepening, then the best way to do this is through regional banks," said Moustapha Mounah, the assistant portfolio manager at James Investment, who has increased his stake in companies like SVB Financial Group.

According to Mounah, investors expect regional banks to benefit from rate increases, but the pace at which the Federal Reserve tightens monetary policy might be critical. A too-steep trajectory of rate increases may cause economic growth to be weighed on bank earnings.

In March, Fed funds futures traders raised a 25 basis point increase, complemented by three additional rate rises by the end of the year.

Investors await Zions Bancorp earnings for next week's Fed meeting, which concludes on Wednesday. It is expected to publish its latest quarterly results Monday, followed by First Bancorp on Tuesday and United Bankshares Inc on Wednesday.

According to Tenner, the rate rises in the Federal Reserve will directly affect sector investment, according to Tenner, an analyst at D.A. Davidson & Co. Tenner recently added two more expected rate rises of 25 basis points to his valuation models for regional banks, bringing his total to four until the end of 2023.

"The impact of higher interest rates is potentially more positive for regional banks' estimates and returns," according to the Swiss economist.

Besides a too slow rate rise, regional bank stocks might suffer if a stock selloff that has already pushed the Nasdaq into correction territory accelerates further, raising expectations that the Fed will increase rates at a slower pace to avoid destabilizing markets.

"There's still a debate in the share price about how much the Fed is going to raise and how fast. If the Fed backpedals then the rally we've been seeing here may slow," said Steve Comery, a research analyst at GAMCO Investors. L1N2TZ2JG

Brady Gailey, the managing director of Keefe, Bruyette, and Woods, believes that even two or three rate increases would be sufficient for the business to follow on aftermarket earnings growth, according to him.

"They are expected to be a major beneficiary of higher rates, but there are also other essentials that the sector has going for it," he said.

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