Bank stocks have done well during the pandemic. As of writing, almost all the banks have reported second quarter earnings. And the news continues to be good. Banks are reporting strong revenue and earnings as consumers unleash some of their pent-up demand.
And for the last 18 months, the banks have had a friend in the Federal Reserve. The Fed remains committed to an accommodative monetary policy that ensures plenty of liquidity, at least for now. At the heart of the Fed’s stance is its contention that inflation is transitory. However, a $2 trillion infrastructure package and perhaps a larger reconciliation bill behind will put that theory to the test.
Simply put, the Federal Reserve may not be able to keep interest rates at bay for as long as they have previously stated. And that means that interest rates may be on the rise. Rising interest rates are generally bearish for banks, but there are some that are prepared for this situation more than others.
Here’s a list of seven bank stocks that, for different reasons, can still flourish if interest rates rise faster than expected.
- JPMorgan Chase (NYSE:JPM)
- Bank of America (NYSE:BAC)
- Wells Fargo (NYSE:WFC)
- Citigroup (NYSE:C)
- US Bancorp (NYSE:USB)
- Goldman Sachs (NYSE:GS)
- SPDR S&P Bank ETF (NYSEARCA:KBE)
Bank Stocks for Interest Raises: JPMorgan Chase (JPM)
JPMorgan Chase easily tops this list of bank stocks. The bank is a well-run colossus that has become a bellwether for the broader economy. While it’s fair to note that many banks performed well during the pandemic, it’s hard to see how the bank would not benefit from rising interest rates.
In its most recent earnings report, JPMorgan reported growth in deposit accounts. It’s fair to point out that a significant reason for this increase was the liquidity provided by the Federal Reserve. However, since the Fed is showing no inclination of turning off the spigot, investors can expect deposit growth to continue.
The bank is also showing that lending remains constant and it is seeing growing revenue in its investment banking sector. JPM stock is up 20% for the year, but with the performance of the S&P 500 it’s fair to suggest that the stock is currently undervalued. Plus investors get a $3.60 annual dividend that currently has a 2.37% yield.
Bank of America (BAC)
Rising interest rates are generally problematic for banks. While depositors may appreciate the higher rates, it’s a cost that banks have to account for. However, among the bank stocks, Bank of America has the highest percentage of non-interest bearing accounts.
The benefit is simple enough to understand. Bank of America will have to make fewer allowances for rising rates.
Higher interest rates would also help to offset the 6% decline in net interest income the bank reported, largely due to lower interest rates.
On the bank’s recent earnings call, it announced two decisions that will benefit shareholders. The first is that it is increasing its dividend. The second is that it will be undertaking a $25 billion share repurchase plan.
BAC stock is up 26% in 2021 despite being down 8% in the last 30 days as of Aug. 2. Analysts have a 12-month price target of $43.55, which is a gain of about 14% from its current level.
Bank Stocks for Interest Raises: Wells Fargo (WFC)
It may not be a great time to be a customer at Wells Fargo, but it’s not a bad time to be an investor. Wells Fargo has been a stalwart performer this year. WFC stock is up 54% in 2021. And the bank recently increased its dividend by 10 cents per share. However, with the stock still trading below pre-pandemic levels, there’s still room for the stock to move higher.
The bank is making the unpopular move of closing down all personal lines of credit. However, Wells Fargo is the largest consumer lender, an area that logically stands to gain from rising interest rates. Rising interest rates would be one way the bank can increase revenue.
And that would be welcome news for investors who have been relying on the bank’s cost cutting maneuvers since the fake account scandal put an asset cap on the bank. Fortunately, Wells Fargo’s recent results are showing that its cost-cutting moves are paying off. But it would benefit from getting back into the good graces of investors.
Yet another big bank to consider is Citigroup. And there is an oddly specific reason for that. Rising interest rates are a risk-reward proposition for banks. On the one hand, rising interest rates drive more revenue to the top line. However, they also have a historical link to rising consumer defaults.
Citigroup has low exposure to consumer lending, therefore it is less likely to be effected by consumer defaults. And if that wasn’t oddly specific enough, there’s another thing to consider as it relates to interest rates. While Citigroup has low exposure to some forms of consumer lending, it is one of the leading credit card providers. Interest on credit cards rises almost immediately with the Fed funds rate. This means that Citigroup will have another revenue stream.
Citigroup stock is underperforming the broader market. It is up only 11% in 2021. However, analysts are projecting that the stock has an upside of 24% from its current level.
Bank Stocks for Interest Raises: US Bancorp (USB)
While it’s logical that many investors would pay attention to the big banks, US Bancorp is one of the stronger regional banks to consider. The bank reported a double beat in its recent earnings report. That hasn’t had much effect on the stock.
USB stock has climbed 29.5% in the last five years. That’s not a bad return for a value stock. But it does trail the 51% return of the SPDR S&P Bank ETF over the same time period. However, if you look at rising interest rates as a tide that lifts all boats, then you could say that USB stock may have a higher upside, particularly with the growth of its payment business which still hasn’t returned to its 2019 level.
It already pays out a dividend that puts it in par with other competitors such as PNC Financial (NYSE:PNC) and Truist Financial (NYSE:TFC). And for those that are influenced by such things, Warren Buffett owns a large position in USB stock.
Goldman Sachs (GS)
I read a statement that caught my attention. Many analysts believe the stock market is overvalued. Yet those same analysts believe the market will continue to climb. If the second of those statements is true it would be a bullish sign for Goldman Sachs.
GS Stock has climbed 45% in 2021 and investors have to look no further than two blowout earnings reports to substantiate those results. That’s not likely to continue. But GS stock remains a compelling buy for investors. The investment banking company pays out a generous $5.00 per share annual dividend which would help blunt any slowdown in the company’s stock price growth.
Rising interest rates would seem to portend badly for Goldman Sachs. However, there is no indication at this time that trading activity will slow down. In fact, the larger concern for Golmand Sachs would seem to be a slowdown in the economy if the Delta Covid-19 variant causes a return to more extreme mitigation efforts in the United States.
Bank Stocks for Interest Raises: SPDR S&P Bank ETF (KBE)
If you want to invest in bank stocks without investing in specific names, an exchange-traded fund (ETF) is typically a good option. In the case of bank stocks, one that stands out is the SPDR S&P Bank ETF. The fund is up 18% in 2021 as of Aug. 2. By way of comparison, JPMorgan Chase is up 20% in that same time frame. And the gain is roughly comparable to the year-to-date gain in the S&P 500.
The S&P Bank ETF is equally balanced among its 88 components. This takes the weight off of any one particular stock. It also has an appealing expense ratio of just 0.35% which equates to $35 annually per $10,000 invested.
Investing in bank stocks gives the fund a dividend that adds to its total return. At the time of this writing, the dividend yield is approximately 2.23% which is almost double the yield of the 10-year Treasury note.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.