5 Bank Stocks To Bet On Despite Fewer Rate Hikes In 2019

The widely expected interest rate hike was announced at the end of the two-day Federal Reserve Open Market Committee (FOMC) meeting yesterday. The federal funds rate, increased for the fourth time this year, now stands at 2.25-2.50%.

Despite this, majority of the finance sector stocks (which usually benefit from higher rates) ended the day in red as broader markets declined. Fears that the central bank’s interest rate hike will hurt the economy dragged the S&P 500, Nasdaq and the Dow Jones to almost near respective 52-week lows.

Besides, the S&P 500 Financial (sector) and the S&P 500 Bank (Industry Group) indexes were down 1.2% and 1.7%, respectively. Further, SPDR S&P Bank (NYSE:KBE) ETF XLF fell 1.3%.

Also, the Fed signaled one less rate hike for 2019 than what it had projected in September. Now, the central bank expects two rate hikes in 2019, one in 2020 and no rate hike in 2021. Perhaps the markets expected further support from the central bank in terms of rate hikes.

The Fed statement said, “The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.”

The sole change from the November post-meeting statement was the addition of “some” to define the trajectory of future rate moves. It now “judges” that rate increases are apt whereas in November's statement it had said it “expects.”

Additionally, the Fed will be monitoring “global economic and financial developments and assess their implications for the economic outlook.” Thus, this reinforces investors’ perception that future rate decision will be highly data dependent.

With expectation of slowdown in global economy, trade war concerns and Brexit-related uncertainty, timing of rate hikes next year and beyond will be difficult to predict.

Additionally, the Fed lowered domestic economic growth projections for 2018 and 2019 to 3% and 2.3%, respectively. In September, the central bank had forecast economic growth of 3.1% for 2018 and 2.5% for 2019.

Banks & Interest Rates

The banking industry benefits the most from rising rates. Banks derive benefits from a steep yield curve (widespread between short and long-terms rates). A rise in short-term rates (to which deposits are tied) helps banks charge more on loans (to which long-term rates are tied), if the long-term rates are higher than the short-term ones. So, banks gain from rising interest rates only if the increase in long-term rates is higher than the short-term ones.

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Also, rising rates reflect a solid domestic economy. This implies that credit quality is improving, which is great for banks' profitability as well. In addition, banks are expected to gain from easing of stringent regulatory restrictions and lower tax rates.

Thus, the Fed’s decision of reducing the number of rate hikes in 2019 will slightly dent investor sentiments. Also, lower economic growth projection may hamper banks’ performance to an extent.

However, banks’ measures to boost profitability and higher rates will support growth.

Selecting the Winning Bank Stocks

While all banks will benefit from higher interest rates, to pick a handful of these for your investment portfolio is not an easy task. To make this daunting work somewhat easier, we have taken the help of the Original post

Written By: Zacks Investment Research