Bank Stocks Aren’t the Rising-Rate Bets They Used to Be. M&T Bank Stock Looks Like a Buy.
Citigroup’s Keith Horowitz’s price target of $220 on M&T Bank shares suggests 20% upside from Friday’s close.
Daniel Tepper/Bloomberg
Like a child waiting for a birthday present only to find he got a sweater instead of a puppy, bank investors are finding that rising rates aren’t the gift they were hoping for.
Rising rates are typically good for banks. They often mean banks can charge more for loans and earn a higher net-interest margin, the difference between the rates at which they borrow and lend. As interest rates rise, that means bank earnings should get a boost. The Federal Reserve typically starts a hiking cycle when there’s still a lot of runway for economic growth, so investors usually don’t need to worry about an imminent recession, which would make new loans riskier and default rates on old loans rise.
This isn’t your usual hiking cycle. Even the Fed acknowledges that it’s getting a late start, and rate increases of half a percentage point or more are possible at upcoming meetings. That late start also means that the so-called yield curve—the difference between shorter- and longer-term rates—is very flat in places. If short rates rise above longer-term rates, it would “invert” the curve, signaling a looming economic slowdown. Throw in concerns around the Russia-Ukraine war, and it’s no wonder investors have been reluctant to push bank stocks higher. The SPDR S&P Bank exchange-traded fund (ticker: KBE) has gained 2.3% since the Fed raised rates on March 16, even as the S&P 500 has rallied 6.6%.
But even without a recession, investors can point to other worries. Jefferies analyst Ken Usdin notes that while rising rates can boost net-interest margins, they also cause bank assets to fall in value because bond prices move in the opposite direction of yields. That could cause banks’ tangible book values to drop, and for large banks, it could mean lower capital ratios—and less cash to return to investors.
Banks understand this, so they have moved more of their assets to the “held to maturity” bucket, where they don’t need to mark prices to market. Still, it’s one more possible headwind for the sector. “Rising interest rates are a double-edged sword for the banks,” Usdin writes.
None of that means banks are going to tumble anytime soon—they’ve actually held up better than the overall market this year. It’s just that they aren’t the slam dunk they might otherwise have been. For investors, that means getting more selective than simply buying the SPDR S&P Bank ETF.
M&T Bank (MTB) is one stock that looks interesting. The company’s acquisition of People’s United Financial (PBCT) was just approved by regulators. It should close by April 1, and its closing should allow M&T to invest more of its cash, notes Deutsche Bank analyst Matt O’Connor.
That might not seem like a good thing, considering rising rates. But buying bonds now isn’t such a bad option. “Even two-year Treasuries offer 2%-plus rates right now, i.e., better yields and relatively low duration risk,” O’Connor writes. He expects M&T Bank shares to hit $200, up 9% from Friday’s close of $183.57.
Citigroup’s Keith Horowitz, meanwhile, has added M&T Bank to the bank’s Focus List, citing the deal approval, its ability to grow earnings, and a “strong credit profile.” His price target of $220 suggests 20% upside from Friday’s close.
With M&T’s stock starting ready to break out, we’re banking on it.
Write to Ben Levisohn at [email protected]
