From Bob Ciura: It’s official: The Federal Reserve raised interest rates at its March meeting. On March 15, the U.S. central bank announced its second interest rate hike in the past three months.
The Fed funds rate, which is the overnight bank-to-bank lending rate that is widely viewed as a benchmark for interest rates more broadly, will rise to a target range of 0.75% to 1%.
In addition, the Fed reiterated its intention to raise rates as many as three times in 2017.
This represents a remarkable departure from the Fed’s previous policy of monetary easing.
Now that the U.S. economy is growing more consistently, and consumers are in stronger financial standing, the assumption is that the economy can withstand higher interest rates.
A return to a rising-rate cycle would be a huge tailwind for three big bank stocks in the U.S., all of which pay dividends.
Big Bank Stocks: JP Morgan Chase (NYSE:JPM)
As the largest U.S. bank by assets, JP Morgan will likely be among the biggest beneficiaries from higher interest rates.
Higher interest rates mean banks make more money on loans they issue. They also have to pay more to depositors, but the spread between the two expands in a rising-rate environment.
Rates are likely to increase faster, and by a larger margin, for longer-dated loans like consumer loans, mortgages, and auto loans, than for short-term deposits.
This will help JP Morgan’s net interest margin, which is already showing improvement.
Last quarter, the bank grew revenue by 2%, thanks largely to a 5% increase in net investment income. In the core consumer & community banking segment, average loans and deposits rose by 14% and 11%, respectively.
There were also pockets of strength across JP Morgan’s other businesses. For example, commercial banking revenue rose 12% to a record $2 billion last quarter. And, JP Morgan’s asset management business saw record average loan balances.
For 2016, JP Morgan carried a Common Equity Tier 1 ratio of 12.2%, indicating a well-managed balance sheet and comfortable financial position.
JP Morgan also pays a solid 2.1% dividend, and last year increased its dividend by 9%.
Big Bank Stocks: Bank of America (NYSE:BAC)
Bank of America is one of the largest banks in the country, with a market capitalization above $250 billion.
In the fourth quarter, revenue net of interest expense increased 2% to $20 billion. Like JP Morgan, this was due mostly to rising net interest income, which was up 6%.
Going forward, Bank of America will see a huge boost if the Fed raises rates three times, because net interest income represents more than half of the company’s total revenue.
The other key growth catalysts for Bank of America are an improving loan portfolio, and cost cuts.
Last quarter, the company set aside $774 million in provisions for credit losses. This was a huge reduction from $810 million in the same quarter the previous year, and indicates the bank’s loan quality is improving.
Plus, Bank of America’s non-interest expense fell 6% year over year.
When combined with rising interest rates, these are all positive indicators for future earnings growth. Earnings per share soared 48% last quarter.
Such strong earnings growth will help Bank of America continue to reward shareholders with growing dividends and share buybacks.
And, the stock is still relatively cheap, trading at just 16 times earnings.
Bank of America stock has a 1.2% dividend yield.
Big Bank Stocks: U.S. Bancorp (NYSE:USB)
U.S. Bancorp had a record year in 2016. The company’s net income grew to $5.9 billion, a company record. Earnings also set a record, at $3.24 per share, up 3% from 2015.
Average loans and deposits rose 7% and 9% respectively, in 2016. In addition, U.S. Bancorp is seeing accelerating growth in its investment fees, which rose 10% last quarter.
U.S. Bancorp’s commercial banking business enjoyed positive loan growth, in addition to lower delinquency rates in 2016.
The rise in rates could spur increased home-buying activity, which would be a huge boost to U.S. Bancorp.
As a regional bank, U.S. Bancorp has a large mortgage banking business, which saw 14% growth last quarter.
And, it will see similar benefits as the other big banks, from rising rates: U.S. Bancorp’s net interest income increased 5% last year.
U.S. Bancorp has a 2% dividend yield, and in 2016 the company hiked its shareholder payout by 10%.
The Financial Select Sector SPDR Fund (NYSE:XLF) was trading at $24.84 per share on Thursday afternoon, up $0.1 (+0.40%). Year-to-date, XLF has gained 6.84%, versus a 6.72% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Wyatt Investment Research.