The banking industry can generate revenue on rising interest rates, but exchange traded fund investors shouldn’t bank on higher profits.
Chris Mutascio, an analyst at Stifel Financial Corp.’s KBW unit, warns that rising rates won’t necessarily translate to higher profit growth, reports Laura Marcinek for Bloomberg.
In a slow growth environment, banks can struggle to increase lending. Meanwhile, rising rates are already cutting into mortgage revenue.
Still, higher rates would help bankers see wider “spreads” or profit margin between what they pay for short-term deposits and long-term yields earned on lending. [Regional Bank ETFs Still Showing Promise as Rates Rise]
“If you’re a bank that takes in deposits and lends money out, you’re probably going to appreciate a steeper curve more than an institution that focuses more on trading,” Scott Warman, treasurer of M&T Bank Corp. (MTB), said in the aritcle.
Regional bank saw their first-half earnings increase 21% year-over-year as lenders took back money from reserves that had been intended to cover future losses.
Currently, the sector is starting to transition from growth backed by tapping reserves to growth backed by better lending and margins on improving rates. Consequently, Mutascio warns that investors may be betting on bank stocks too early.