The Fed is about to raise interest rates again: 3 bank stocks will benefit from the rate hike

Over the past year, inflation has remained high, causing serious damage to consumers and investors alike. Economists hoped for better news in August, but it did not come.

Earlier this week, the U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) data for August, which measures changes in the cost of consumer goods. The data revealed that due to the rise in food and housing costs offsetting the decline in energy prices, the annual inflation rate was 8.3%.

Investors are now turning their attention to the Fed, as the Fed has been actively fighting inflation with its main tool - rate hikes. The Fed's 75 basis point rate hike in June was the largest in 28 years. The Fed raised rates by another 75 basis points in July, and investors expect a similar increase at the upcoming meeting next week. Although rate hikes increase borrowing costs, damaging most companies, bank stocks benefit. That's the reason.

One of the main ways banks make money is by charging credit rates higher than deposit rates. While some banks earn additional income from fees, others have profitable investment banking divisions, but most banks generate revenue from interest rates.

When interest rates are low, banks face challenges as it often squeezes the interest margin, i.e., the interest charged minus the amount paid. When interest rates rise, this margin tends to expand, and banks see an improvement in their profitability. Nevertheless, the following three banks will greatly benefit from the ongoing rate hikes.

Bank of America
Bank of America $Bank of America (BAC.US)$ Bank of America is the second largest bank in the United States, with assets exceeding 2 trillion dollars, and is also one of the major banks most sensitive to interest rates. One reason is that 40% of its 1.4 trillion-dollar consumer wealth management client deposits are in low-interest or interest-free checking accounts. Therefore, as interest rates rise, Bank of America can generate more income from these deposits.

In the first half of this year, Bank of America's net interest income (NII) increased by 18% compared to the first half of last year, reaching 24 billion dollars. In the recent regulatory filings, the bank stated that a 100 basis point increase in interest rates will help NII grow by 5 billion dollars in the next year, an 11% increase from NII 12 months ago.

Bancorp
Bancorp $The Bancorp (TBBK.US)$ Bancorp is different from traditional banks because it does not have branches. Instead, these banks provide private label banking services to online and non-bank lenders.

The bank provides back-end services such as regulatory compliance and access to payment networks such as Visa and Mastercard. $Visa (V.US)$ Visa $MasterCard (MA.US)$ and Mastercard. It has over 100 clients, such as PayPal Holdings. $PayPal (PYPL.US)$ And the chimes, turn to Bancorp and these services to help non-bank customers provide their own payment products.

The bank's net interest income has not changed much in the first half of this year, but this is due to how interest rates affect the timing difference of its deposits and loans. Most of the bank's deposits are made through prepaid and debit card accounts, and when interest rates rise, the bank quickly adjusts the rates on these deposits.

However, its loans are variable rate and take longer to adjust to changes in interest rates. These loans are typically repriced on a monthly or quarterly basis, and the bank expects interest rate increases in the second half of this year to be beneficial.

According to its regulatory filing, a parallel rate hike of 100 basis points would help NII grow by 9%, while a rate hike of 200 basis points would help NII grow by nearly 19%.

Silvergate Capital
Silvergate Capital $Silvergate Capital (SI.US)$ has been providing banking services to cryptocurrency clients since 2013. One of its earliest products is the Silvergate Exchange Network (SEN), which is a payment transfer network that allows for efficient transfer of cryptocurrencies like $Coinbase (COIN.US)$ or Gemini, in USD. SEN is interesting because it provides Silvergate with a significant amount of non-interest bearing deposits, which benefit the bank when interest rates rise.

The bank has over 13 billion USD in interest-free deposits, accounting for 99.5% of its total deposit base. Therefore, Silvergate has benefited from the rise in loan portfolio rates without increasing expenditure on deposit accounts.

Silvergate's NII (Net Interest Income) grew by 126% in the first half of this year, reaching 0.121 billion USD. In the recently submitted regulatory filing, the bank pointed out that a parallel increase in interest rates by 100 basis points would result in a nearly 16% growth in NII, while an increase of 200 basis points would lead to a 31% growth in NII.