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The potential for Fed tightening and rising rates has the market on edge. This week saw the worst weekly performance of the Dow this year as investors fear a future with higher interest rates.

However, some banks currently stand to profit from the rising rates. This means a potential investment opportunity if stocks continue to sell off as rates rise.

Finding the Winners in A Rising Rate Environment

Many banks report the estimated effects rising rates would have on the value of their loans and their net income (or net interest income) if rates were to rise in their 10-Q or 10-K statements. For example, see below:

(click to enlarge)

This is usually buried deep within the company's statement under the "risk management" section. It is meant to tell investors the sensitivity the bank's balance sheet has to a potential rise in interest rates. However I think investors may be able to use it to instead gauge potential winners in a rising rate environment.

There are over 6,900 banks in the U.S. today. Analysis of each bank for this article means going through the company's latest 10-Q filing, transferring some numbers on a spreadsheet and doing some minor calculations. To do this for 6,900 banks is a little more work than I would like to do, so I wanted to narrow down the number of banks to look into.

In order to do this, I used Yahoo Finance stock screener for stocks that exhibited the following criteria:

  • Return on Assets greater than 1.2%
  • Return on Equity greater than 10%
  • Dividend yield greater than or equal to 2%

The ROA and ROE numbers come from a slightly relaxed criteria determined to be figures consistent with thriving banks according to the Federal Reserve. You can learn more about that in a previous article found here on Seeking Alpha: "Identifying Thriving Small Banks Using Federal Reserve, FDIC Data".

The dividend was put in the screen to ensure that if rates stay steady for some time, at least investors will at least get some return while waiting.

Not all banks report the effect rising rates will have on their incomes, so if a bank made it through the screen, but did not report these numbers explicitly in their latest 10-Q, they will not appear in the article here.

Presented below is the results, starting with the bank who currently appears to benefit the least from rising rates and ending with the bank appearing to benefit the most.

To arrive at the "Estimated 'New' Income" in the tables below I added the change in estimated net interest income after the corresponding rate rise to the banks previous bottom line to arrive at the income the bank would see if rates rise.

"New" P/E is calculated assuming today's market cap, meaning the stock price remains unchanged.

All stock data below comes from Yahoo Finance. All estimates for change in income from rising interest rates comes from the company's latest 10-Q report.

(NASDAQ:CBSH) - Commerce Bancshares, Inc.

ROA (%)ROE (%)Dividend Yield (%)
1.2212.002.0
Market CapNet Income Avl to shareholdersToday's P/E
4.09B257M15.92
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
300-1.98%245,140,00016.68
200-0.75%252,440,00016.20
100-0.02%256,810,00015.93

(CBU) - Community Bank System Inc.

ROA (%)ROE (%)Dividend Yield (%)
1.2210.583.2
Market CapNet Income Avl to shareholdersToday's P/E
1.36B78.04M17.43
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
200-1.60%73,611,00018.48

(NYSE:USB) - U.S. Bancorp

ROA (%)ROE (%)Dividend Yield (%)
1.4814.662.5
Market CapNet Income Avl to shareholdersToday's P/E
67.8B5.52B12.82

Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
200+1.53%5,604,456,00012.09
50+1.22%5,587,344,00012.13

(CVBF) - CVB Financial Corp.

ROA (%)ROE (%)Dividend Yield (%)
1.210.333.0
Market CapNet Income Avl to shareholdersToday's P/E
1.38B77.23M17.87
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
200-0.75%76,650,77518.00
-100-0.59%76,774,34317.97

(NASDAQ:CHCO) - City Holding Co.

ROA (%)ROE (%)Dividend Yield (%)
1.3812.263.30
Market CapNet Income Avl to shareholders (($,TTM))Today's P/E
694M42.1M16.48
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
400+2.90%43,320,90016.01
300+3.80%43,699,80015.88
200+2.80%43,278,80016.04
100+0.20%42,184,20016.45

(NASDAQ:RBCAA) - Republic Bancorp Inc.

ROA (%)ROE (%)Dividend Yield (%)
2.6722.862.6
Market CapNet Income Avl to shareholdersToday's P/E
564M46.76M12.07
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
300+2.90%49,813,00011.33
200+2.35%49,236,00011.46
100+1.29%48,119,00011.72

(NASDAQ:MBWM) - Mercantile Bank Corp.

ROA (%)ROE (%)Dividend Yield (%)
2.4525.772.6
Market CapNet Income Avl to shareholdersToday's P/E
171.9M14.08M12.21
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
400+3.70%15,760,00010.91
300+2.90%15,390,00011.17
200+1.20%14,610,00011.77
100+0.80%14,420,00011.93

(NASDAQ:PWOD) - Penns Woods Bancorp Inc.

ROA (%)ROE (%)Dividend Yield (%)
1.7416.824.1
Market CapNet Income Avl to shareholdersToday's P/E
208M14.11M14.74

Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
400+3.83%15,680,00013.27
300+3.36%15,487,00013.43
200+2.11%14,973,00013.89
100+0.84%14,454,00014.39

(NASDAQ:BBCN) - BBCN Bancorp Inc.

ROA (%)ROE (%)Dividend Yield (%)
1.4710.72.1
Market CapNet Income Avl to shareholdersToday's P/E
1.14B80.06M14.24
Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
200+5.31%84,311,18613.52
100+2.51%82,069,50613.89

(NASDAQ:AMNB) - American National Bankshares Inc.

ROA (%)ROE (%)Dividend Yield (%)
1.63

12.78

3.90
Market CapNet Income Avl to shareholdersToday's P/E
185.15M15.92M11.63

Basis Point Change in RatesEst. Change in Net Interest IncomeEst. "New" Income"New" P/E
400+19.50%24,377,0007.60
300+14.60%22,245,0008.32
200+9.50%20,021,0009.24
100+4.30%17,790,00010.40

Conclusion

Maybe some investors shouldn't fear rising rates after all.

Keep in mind that banks can add or remove hedges on interest rates at any time, so be sure and investigate new 10-Qs as they get reported for any changes.

Will the sell off due to investors being scared of rising rates continue? For potential investors in some of these banks, they should hope so, because they may be able to pick up some very cheap shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Rising Rates Mean Rising Profits For These Banks