S&P 500 financials have rallied almost 25% since Donald Trump won the election, tops of all sectors.
President Trump has promised to roll back regulations, including Dodd-Frank, and that is expected to help banks use their capital more efficiently.
Additionally, traders are 100% certain the Fed will raise rates when it meets next week, and higher interest rates are expected to improve bank margins by improving lending rates.
Analysts at RBC set out to calculate the impact higher interest rates would have on bank earnings, depending on the size of rate hikes, and banks that are set to benefit the most.
“A rise in short-term interest rates is expected to favourably impact earnings, through a higher net interest margin, which should lead to higher stock prices,” they wrote.
“Using each bank’s assumption for the net interest revenue increase resulting from a 100 or 200 basis point increase in interest rates,” they said, “we calculate that the top 20 banks would on average see an increase in net interest revenue equivalent to 7.1% of 2017 estimated earnings.”
According to their calculations, Comerica, Citizens Financial Group and Regions Financial Corporation are set to be the biggest winners from a rate hike of 200 basis points, and Bank of America likely to gain the most if rates rise by 100 basis points.
“Among the top 20 banks, we believe the stocks that could see the most benefit from rising short-term rates include BAC (Bank of America), CFG (Citizens Financial Group), CMA (Comerica), JPM (JPMorgan Chase), MTB (M&T Bank), and RF (Regions Financial),” they further noted.
“Over time, however, ever increasing short term interest rates eventually will work against the banks,” they warned, “as they are forced to pass more of the rate increase along to depositors and second, higher interest rates often lead to a slower economy which would usher in the down leg of the credit cycle.”