With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Although the Fed unveiled its first rate hike of 2017 last month, the central bank’s dovish tone punished regional bank stocks and ETFs.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“Rising rates have not always resulted in increased bank net interest margins (NIM), especially under a flattening yield curve. US bank NIMs compressed during the last major US rate hiking cycle – from 1Q04 to 4Q06 – when short end rates rose, while the long end remained roughly stable,” adds Fitch.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
For more information on the financial sector, visit our financial category.