Banking, finance, and taxes

7 Stocks Rallying From Hopes of Higher Interest Rates

Jon C. Ogg

Published: May 18, 2016 3:34 pm

Last Updated: January 13, 2020 7:52 am

Being in the financial services industry has been no simple game during the years of quantitative easing and of zero interest rates. With the odds if an interest rate hike just going up in June, some financial giants will likely win more than others if interest rates start to rise faster. The long and short of the matter is that some banks and financial institutions will do better than peers on a relative basis because their earnings have been hampered for years.

24/7 Wall St. tracked 7 stocks in the financial sector that were rallying handily from the odds of higher rates as soon as June.

We looked through the expectations from the Fed’s minutes released on Wednesday. This was the one quote which leads Wall Street and Main Street to both look for higher rates still being in the cards:

Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

The reality is that many other financial stocks rallied as well. These were just the ones we track routinely that saw exaggerated moves relative to peers.

Bank of America Corp. (NYSE: BAC) has remained a bank that is hindered by lower interest rates. Of the money-center banks, it seems Bank of America was the one which needed rates to rise more. Shares of Bank of America were last seen up nearly 5% at $14.69, versus a 52-week range of $10.99 to $18.48 and a consensus analyst target of $17.43.

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Citigroup Inc. (NYSE: C) is also in need of higher interest rates for capturing spreads it pays on deposits versus what it receives from overnight and short-term portfolio investments. The difference here is that it is corporate rather than individuals and corporate. Citigroup shares were recently trading up 5% at $45.90. The stock has a consensus analyst price target of $56.42 and a 52-week trading range of $34.52 to $60.95.

E*TRADE Financial Corp. (NASDAQ: ETFC) has remained stuck in the mud. With all of those massive customer deposits, it has been unable to make any money to speak of on a yield spread of the raw cash just sitting there. E*TRADE recently said that its April-end brokerage related cash was a whopping $42.6 billion, so a spread of 20 basis points would translate to an extra $85 million in net income — and its bank-related cash and deposits were $5.3 billion. Shares of E-Trade were last trading up 5% at $26.43, with a 52-week trading range of $19.61 to $31.48 and a consensus analyst price target of $30.07.

Genworth Financial, Inc. (NYSE: GNW) will be a beneficiary of higher rates as well. Its long-term care costs have risen and risen, and it sells annuities. It has had financial concerns for years, but less and less from mortgage insurance of late. Genworth stock was last seen up 5.4% at $3.68. The stock as a consensus analyst price target of $3.66 and a 52-week trading range of $1.57 to $8.12.

MetLife Inc. (NYSE: MET) has needed interest rates to rise to help out on life insurance investing. Lower interest rates makes many new long-term life insurance policies more expensive because earning less than 3% in a 30-year Treasury  Bond makes it hard to plan for someone aged 50 buying a policy to get their beneficiaries paid when they die at 80. Shares of MetLife were recently trading up 3.6% at $44.86, versus a 52-week trading range of $35.00 to $58.23 and a consensus analyst price target of $51.07.

TD Ameritrade Holding Corp. (NYSE: AMTD) shares the same trait as E*TRADE in needing higher short term rates so it can capture a spread from its massive brokerage cash deposits. TD Ameritrade shares were last trading up 5.5% at $30.41, with a consensus analyst price target of $33.43 and a 52-week trading range of $24.88 to $39.05.

The Charles Schwab Corporation (NYSE: SCHW) is another company in need of higher rates. Its customers are the largest of the discount brokerages, but it is also perhaps insulated better with a larger base and with more operations. A $38 billion market cap may speak to that tune – and its total client assets were a record $2.58 trillion at the end of April. Shares of Charles Schwab were last seen up 4.7% at $29.22. The stock has a consensus analyst price target of $32.31 and a 52-week trading range of $21.51 to $35.72.

Again, these are far from the only banking and financial services stocks that rose after the FOMC minutes from the April meeting were released.