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):
- 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 (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 (FITB) and Commerce Bancorp (CBH). Citigroup's (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 (RKH), or go long stocks with positive exposure to online banking, such as online brokerages E*Trade (ET), Ameritrade (AMTD) and Schwab (SCHW), which are moving aggressively into online banking and customer asset accumulation.