Banking & Finance

3 Banks to Buy Now for Coming Higher Interest Rates

While many on Wall Street seemed petrified of the prospect of rising interest rates, the bottom line is that even if the Federal Reserve raises rates four times this year, for a full 1% increase, that would only put the funds rate at 2.5%, which is historically still quite low. In comparison, the funds rate before the housing collapse in 2007 was 4.75%.

One industry that is fine with rates going higher is banking, and a new research report from Erika Najarian, the banking analysts at Merrill Lynch, notes that LIBOR, which many debt issues are based on, is going higher. While noting that concern by investors should be limited, Najarian highlighted three banks rated Buy with net interest margin that should benefit from the increase.

Net interest margin is a ratio that measures how successful a firm is at investing its funds in comparison to the expenses on the same investments. In other words, offering bank customers a two-year certificate of deposit at a 2% and using the deposit to buy a two-year Treasury that yields a 2.26%.

Here are the three banks rated Buy that should benefit from the higher rates.

Zions Bancorp

This is a top regional that Merrill Lynch recently added to its US 1 list, and it is a top play in the western United States. Zions Bancorporation (NASDAQ: ZION) offers community banking services, such as small and medium-sized business and corporate banking; commercial and residential development, construction and term lending; retail banking; treasury cash management and related products and services; and residential mortgage servicing and lending. It also provides trust and wealth management services; capital markets services, including municipal finance advisory and underwriting; and investment services.

The company also offers personal banking services to individuals, including home mortgages, bank cards, other installment loans, home equity lines of credit, checking accounts, savings accounts, certificates of deposit of various types and maturities, safe deposit facilities, direct deposits and internet and mobile banking services.

Shareholders are paid a 1.43% dividend. The Merrill Lynch price objective for the shares is $60, and the Wall Street consensus target is $58.48. The stock closed trading on Tuesday at $55.75 a share.

SVB Financial

This boutique financial services firm may be off many investors’ radar screens. SVB Financial Group (NASDAQ: SIVB) is a financial holding company that serves companies in the technology, life science, venture capital, private equity and premium wine industries, offering diversified financial services such as commercial, investment, international and private banking. Headquartered in Santa Clara, California, the company operates through offices in the United States and international operations in China, India, Israel and the United Kingdom.

The analysts are very positive on the company’s positioning and noted this after meeting with the bank last month:

We hosted Silicon Valley Bank-SIVB , which is a top pick for 2018 , and CFO Dan Beck for investor meetings. What was clear to us is that the growth opportunity ahead of the bank is arguably even better relative to the last 10-15yrs. Raising 2019 estimated EPS by 9% to $18 from $16.50 or 18% above consensus.

Merrill Lynch has a whopping $315 price target, and the posted consensus target is $287.74. Shares closed Tuesday at $262.19.

Texas Capital BancShares

This leading mid-cap bank also resides in a very strong area of the country economically. Texas Capital BancShares Inc. (NASDAQ: TCBI) is the parent company of Texas Capital Bank, a commercial bank that delivers highly personalized financial services to businesses and entrepreneurs. Headquartered in Dallas, the bank has full-service locations in Austin, Dallas, Fort Worth, Houston and San Antonio. With all those market showing outstanding growth, and economies stronger than much of the country, the opportunities for a local bank run by well-known Texans is huge.

Many Wall Street analysts see the company as a top pick, given loan growth and exposure to pending rate hikes as much of the loans are floating rate and commercial and industrial loans. This smaller cap bank also has been mentioned in the past as a possible takeout candidate, given the extremely powerful Texas footprint.

The $112 Merrill Lynch price target is well above the $105.47 consensus target. The stock closed at $95.15 on Tuesday.

Many of the large money center banks have had huge runs. These three should make for far better buys for investors looking for value and for stocks that can benefit from an increase in interest rates.