Internet Competition Hits the Regional Banks

by: David Jackson

HEARD ON THE STREET: Regional Banks in a Rate Whirl
Excerpt from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

HEARD ON THE STREET: Regional Banks in a Rate Whirl

  • Summary: A number of regional US banks have warned investors that their profits are being hit by rising interest rates as consumers and businesses move funds from low-interest-bearing accounts to online savings accounts and CDs paying over 5%. Although rates have been rising for a while, consumers tend to act with a lag and often wait until the higher rates they can earn by moving their accounts exceed the cost and hassle of the move. City National Bank (NYSE:CYN) cut its 2006 EPS growth projection last month from 8-10% to 1-4%, and other regional banks that have issued profit warnings include National City (NCC), Fifth Third Bancorp (NASDAQ:FITB) and Commerce Bancorp (CBH). Citigroup's (NYSE:C) online savings account now pays 5% versus its traditional savings account that pays 0.7%. Increased margin pressure is expected to accelerate M&A in the sector as regional banks try to eliminate costs to boost profitability. Citizens Banking Corp. (CBCF) recently agreed to acquire Republic Bancorp (RBNC).
  • Comment on related stocks/ETFs: This is as much an Internet story as a regional banking story. The Internet improves information efficiency and reduces the cost of banking; both factors lead to competitive pressure to raise deposit interest rates. Look at the comments on this article about how to earn higher yeilds, for example.
  • Investors can play this trend in two ways: you can short the Regional Bank HOLDRs ETF (NYSEARCA:RKH), or go long stocks with positive exposure to online banking, such as online brokerages E*Trade (NYSE:ET), Ameritrade (NASDAQ:AMTD) and Schwab (NYSE:SCHW), which are moving aggressively into online banking and customer asset accumulation.