Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.
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Financial services firms, like capital markets, banks and regional banks, are among the top three industries with the highest sensitivity to changes in the 10-year Treasury yield.
“Banks have been a major source of concern for most of the last few years. First, there is the nagging issue of net interest margins, or NIM, which have been under pressure for years. Periodically, banks make a run for higher ground on the hopes a Fed hike would help their cause. September disappointed once again, but banks this time seem a little more resilient. With market multiples stretched, banks represent one of the last sectors where valuations are respectable. Any good news could spark a catch-up rally,” according to Yahoo Finance.
For more information on the banking sector, visit our financial category.