Interest rates, which have been at a near-zero levels since the 2008 financial crisis, are not expected to remain muted for long. Though the Federal Reserve has not come up with any timeline for a rate increase, the recovery of overall economic conditions increases the possibility.
In the latest policy statement, the Federal Open Market Committee (“FOMC”) stated that “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
However, the U.S. economy, which was recovering steadily in 2014, suddenly witnessed sluggishness in the first quarter of 2015, with the real GDP increasing a mere 0.2% (versus 2.2% growth in 4Q14). Further, Wednesday’s disappointing private-sector jobs report from ADP for Apr 2015 depicted that slowdown of the first quarter is continuing in the current period as well. We believe that this dismal picture will also get reflected in government jobs data slated to release later today.
Despite economic indicators suggesting a sluggish pace of recovery, the Fed remains optimistic that the economy will recover soon. The Fed blamed “transitory factors” for the slowdown in the first quarter and noted that “…the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.”
Further, ambiguity about the imminent rate hike is leading to volatility in the market. In spite of this volatility, investors can make some wise decisions by investing in stocks of those sectors that are clamoring for higher interest rates, one of them being the regional banks.
Regional banks benefit from a steep yield curve, i.e. when the spread between long-term and short-term rates is wide. So when the Fed finally decides to hike rates, the two major criteria – improving economy and inflation at 2% – must stand fulfilled. Both these conditions also drive long-term interest rates, most probably more than the Fed raises short-term rates. Further, an improving economy means that credit quality will likely improve, which will also aid banks' profitability.
How to Select Banking Stocks?
We have selected 3 regional bank stocks that are currently well positioned to gain from this rate hike. To select these stocks we have used our new style score system. The attractiveness of these banking stocks as an investment option at this stage is confirmed by their Value Style Score of ‘A’ or ‘B.’ Also, these stocks carry a favorable Zacks Rank.
Boston Private Financial Holdings, Inc. (BPFH - Snapshot Report), headquartered in Boston, MA, offers a full range of banking, commercial and residential lending, and trust and investment management services to its domestic and international clientele.
Zacks Rank: #2 (Buy)
Value Score: B
Dividend Yield: 2.88%
First Commonwealth Financial Corp. (FCF - Snapshot Report), based in Indiana, PA, offers a wide range of consumer and commercial banking services to individuals as well as small and mid-sized businesses in the U.S.
Zacks Rank: #2 (Buy)
Value Score: B
Dividend Yield: 3.09%
Glacier Bancorp, Inc. (GBCI - Snapshot Report) is based in Kalispell, MT and operates as the bank holding company for Glacier Bank that offers commercial banking services to individuals, small to medium-sized businesses, community organizations, and public entities in the U.S.
Zacks Rank: #2 (Buy)
Value Score: B
Dividend Yield: 2.69%
by Zacks Equity Research
Source: http://www.zacks.com/stock/news/174303/3-regional-banks-to-add-to-your-portfolio-as-rates-rise
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