Deep Dive: 20 bank stocks expected to benefit the most from rising interest rates as the Federal Reserve fights inflation


When companies report financial results, analysts tend to make comparisons to the year-earlier quarter. But there are times when sequential improvements can be telling.

This is one of those times for small and mid-sized banks.

Below is a screen that shows which U.S. banks are expected to show the greatest improvement in interest-rate spreads over the next four quarters.


For an example of sequential improvement during the second quarter, Comerica Inc. CMA of Dallas reported a 23% increase in net interest income from the first quarter. A bank’s net interest income is its interest income, less the costs for deposits and borrowings.

This is the core earnings driver for most banks, leaving aside those that focus more on capital-markets activity, such as JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup Inc. C.

According to Christopher McGratty, head of U.S. banking research at Keefe, Bruyette & Woods, capital-markets revenues at the largest U.S. banks are now “clearly in a recession.”

During the second quarter, Comerica’s net interest margin (NIM) — the spread between the average rate it earns on loans and investments, and the average rate it pays for deposits and borrowings — expanded by 55 basis points, to 2.74% from 2.19% in the first quarter.

Comerica attributed this to a shift on its balance sheet, with deposits declining because of the bank’s interest-rate management and “customers utilizing balances to fund business activities.” The bank’s average cost for interest-bearing deposits was 5 basis points in the second quarter, in line with the first quarter.

By the limited information above, it would seem Comerica was flush with cash heading into the Federal Reserve’s round of increases for short-term interest rates and its policy change to allow its securities portfolio to begin running off, which has pushed bond and loan rates higher.

In an interview, McGratty said he and the research team at KBW had a preference for small and mid-cap banks — “the spread-lenders,” he called them — because of “solid loan growth and expanding margins.”

He made three more points:

  • Deposit costs didn’t increase significantly this year through the second quarter, but they will begin to rise more quickly during the second half of 2022.
  • “Assets are beginning to reprice,” which means a greater benefit to banks as commercial loans are renewed; they tend to have relatively short maturities.
  • “The mix of the balance sheet is shifting. Dollars are coming out of cash and going into loans. That is a powerful remixing dynamic.”

Getting back to the largest banks, here’s how their net interest margins changed during the second quarter:

Bank NIM – Q2, 2022 NIM – Q1, 2022 Margin increase
JPMorgan Chase & Co. 1.80% 1.67% 0.13%
Bank of America Corp. 1.86% 1.69% 0.17%
Citigroup Inc. 2.24% 2.05% 0.19%
Source: FactSet
Screen for banks

With the net interest margin expansion for U.S. banks expected to be tempered through the end of 2022, it might be worth a closer look at consensus estimates to see which banks are expected to have their margins widen the most over the next year.

Starting with the 109 banks in the Russell 3000 Index RUA for which net interest margin estimates are available among analysts polled by FactSet, here are the 10 for which net interest margins are expected to expand the most through the second quarter of 2023:

Bank Ticker City Expected one-year NIM increase Est. NIM – Q2, 2023 Est. NIM – Q1, 2023 Est. NIM – Q4, 2022 Est. NIM – Q3, 2022 NIM – Q2, 2022
Comerica Inc. CMA Dallas 1.00% 3.74% 3.74% 3.64% 3.41% 2.74%
M&T Bank Corp. MTB Buffalo, N.Y 0.96% 3.97% 3.94% 3.90% 3.61% 3.01%
BancFirst Corp. BANF Oklahoma City 0.75% 3.80% 3.84% 3.65% 3.41% 3.05%
The Bancorp Inc. TBBK Wilmington, Del. 0.70% 3.87% 3.81% 3.76% 3.51% 3.17%
WSFS Financial Corp. WSFS Wilmington, Del. 0.69% 4.09% 4.13% 4.13% 3.87% 3.40%
Cullen/Frost Bankers Inc. CFR San Antonio 0.62% 3.07% 3.04% 2.99% 2.81% 2.45%
Texas Capital Bancshares Inc. TCBI Dallas 0.62% 3.30% 3.30% 3.19% 3.01% 2.68%
Wintrust Financial Corp. WTFC Rosemont, Ill. 0.60% 3.52% 3.51% 3.45% 3.26% 2.92%
Zions Bancorporation, N.A. ZION Salt Lake City 0.60% 3.47% 3.44% 3.39% 3.20% 2.87%
First Financial Bancorp. FFBC Cincinnati 0.59% 4.02% 4.08% 4.01% 3.86% 3.43%
East West Bancorp., Inc. EWBC Pasadena, Calif. 0.59% 3.82% 3.83% 3.80% 3.59% 3.23%
Regions Financial Corp. RF Birmingham, Ala. 0.51% 3.57% 3.55% 3.47% 3.34% 3.06%
Hancock Whitney Corp. HWC Gulfport, Miss. 0.50% 3.54% 3.54% 3.50% 3.41% 3.04%
National Bank Holdings Corp. Class A NBHC Greenwood Village, Colo. 0.49% 3.79% 3.79% 3.73% 3.56% 3.30%
Seacoast Banking Corp. of Florida SBCF Stuart, Fla. 0.48% 3.86% 3.84% 3.68% 3.57% 3.38%
PNC Financial Services Group Inc. PNC Pittsburgh 0.48% 2.98% 2.96% 2.93% 2.79% 2.50%
Fifth Third Bancorp FITB Cincinnati 0.47% 3.39% 3.38% 3.38% 3.20% 2.92%
Westamerica Bancorporation WABC San Rafael, Calif. 0.47% 3.21% 3.18% 3.09% 2.95% 2.74%
Wells Fargo & Co. WFC San Francisco 0.47% 2.86% 2.84% 2.78% 2.63% 2.39%
F.N.B. Corp. FNB Pittsburgh 0.47% 3.23% 3.18% 3.15% 3.02% 2.76%

You can see the expected margin expansion trailing off in the first half of 2023. But these banks appear poised for an excellent string of quarters, especially if McGratty’s “fairly constructive outlook” for the U.S. economy as the Fed continues its moves to combat inflation holds true.

Click on the tickers for more about each bank. You should also read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

This article was originally published by Read the original article here.

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