Banking & Finance

Deutsche Bank Says 3 Bank Stocks Best Pure Play on Rising Rates

In two weeks the Federal Reserve is expected to raise interest rates for the first time in over eight years. The market is pricing in a 75% probability for the Fed liftoff on December 16, and barring a major international or domestic crisis, that figures to be a go. A new research report from Deutsche Bank takes an in-depth look at how various banks will be affected, and it highlights three that could trade strong initially and sustain forward gains.

Deutsche Bank, like almost everybody on Wall Street, agrees that the first rate hike will be 25 basis points, or one-quarter of 1%. While this really won’t have a huge initial effect on net interest margins and drive them higher, the analysts do note that some banks are more levered to rising medium and long-term rates.

The Deutsche Bank analysts see three top banks as being the purest plays on rising short-term rates, and they think they could see solid gains.

Bank of America

Bank of America Corp. (NYSE: BAC) has continued a methodical march back to financial health and is a true big money center bank to make the list at Deutsche Bank. It is the fifth largest bank in the world by market capitalization and is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. Operating 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platforms, the company continues to open new markets and expand share, and the Merrill Lynch brokerage arm has continued to supply the bank with outstanding revenues and growth.

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CEO Brian Moynihan met with Wall Street and many came away feeling good about the overall outlook for the bank. With the potential for strong commercial lending and credit card originations, and trading at just over 11 times 2016 estimated earnings, the stock makes good sense now. Deutsche Bank cites the bank’s good expense management, loan growth and the valuation as positives.

Bank of America investors receive a 1.14% dividend. The Deutsche Bank price target for the stock, which is rated Buy, is $19. The Thomson/First Call consensus price target $18.73. The stock closed on Tuesday at $17.81.