Another Fed rate hike is coming: 3 bank stocks will benefit from rising interest rates

Inflation has remained high over the past year, causing serious damage to consumers and investors alike. Economists hoped August would bring better news, but it didn't.

Earlier this week, the U.S. Bureau of Labor Statistics (U.S. Bureau of Labor Statistics) released August consumer price index (consumer price index) data, which measures changes in the cost of consumer goods. Data show that prices are growing at an annual rate of 8.3 percent as rising food and housing costs offset falling energy prices.

Investors are now setting their sights on the Federal Reserve, which has been actively fighting inflation with its main tool — interest rate hikes. When the Federal Reserve raised interest rates by 75 basis points in June, this was the biggest rate hike in 28 years. The Federal Reserve raised interest rates by another 75 basis points in July, and investors expect similar increases at next week's meeting. Although interest rate hikes have raised borrowing costs and hurt most companies, bank stocks have benefited. h That's the reason.

One of the main ways banks make money is to charge customers credit interest rates that are higher than interest rates on deposits. While some banks earn extra income from processing fees and others have a lucrative investment banking sector, most banks earn income from interest rates.

When interest rates are low, banks face challenges because this tends to reduce the spread, that is, the interest charged less the amount paid. When interest rates rise, these spreads tend to widen, and banks see improvements in their profitability. Having said that, the following three banks will benefit greatly from continued interest rate hikes.

Bank of America
Bank of America $Bank of America(BAC.US)$ It is the second-largest bank in the US, with assets exceeding $2 trillion, and one of the major banks most sensitive to interest rates. One reason is that 40% of its $1.4 trillion consumer wealth management clients' deposits have low-interest or no-interest checking accounts. As a result, as interest rates rise, Bank of America can earn more from these deposits.

In the first half of this year, Bank of America's net interest income (NII) increased 18% over the first half of last year to reach $24 billion. In a recently submitted regulatory document, the bank said that a 100 basis point increase in interest rates would help NII grow by $5 billion over the next year, up 11% from its NII 12 months ago.

Bancorp
Bancorp $The Bancorp(TBBK.US)$ Unlike traditional banks because it has no branches. Instead, these banks provide private label banking services to online and non-bank lenders.

Banks handle back-end services such as regulatory compliance and access to payment networks such as visas $Visa(V.US)$ and Mastercard $MasterCard(MA.US)$ . Over 100 clients, such as PayPal Holdings $PayPal(PYPL.US)$ and Chimes, turning to Bancorp's services to help non-bank customers with their own payment products.

The bank's net interest income did not change much in the first half of this year, but this was due to how interest rates affected the timing difference between its deposits and loans. Most bank deposits are made through prepaid and debit card accounts, and banks quickly adjust interest rates on these deposits when interest rates rise.

However, its loans have variable interest rates and will take longer to adapt to changes in interest rates. These loans are usually repriced monthly or quarterly, and the bank believes that rising interest rates in the second half of this year will be a tailwind.

According to the regulatory documents it submitted, a 100 basis point rate hike in parallel with interest rates will help NII grow 9%, while a 200 basis point rate hike will help NII grow nearly 19%.

Silvergate Capital
Silvergate Capital $Silvergate Capital(SI.US)$ It provides banking services to cryptocurrency clients, and has been the case since 2013. One of its earliest products was TheSilverGate Exchange Network (SEN), a payment transfer network that allows crypto exchanges such as $Coinbase(COIN.US)$ Or Gemini, to efficiently transfer dollars. SEN is interesting because it provides Silvergate with a large number of interest-free deposits, which allows banks to benefit significantly when interest rates rise.

The bank has over $13 billion in interest-free deposits, accounting for 99.5% of its total deposit base. As a result, Silvergate reaped the benefits of rising interest rates on loan portfolios while not having to increase savings account expenses.

Silvergate's NII grew 126% in the first half of this year to $121 million. In a recently submitted regulatory document, the bank stated that a parallel increase of 100 basis points in interest rates would lead to a nearly 16% increase in NII, while a 200 basis point increase would lead to a 31% increase in NII.