(Bloomberg) Regional lenders including Fifth Third Bancorp and BB&T Corp. are rooting for the Federal Reserve to let interest rates rise, a move that could help their results more than at some of the biggest Wall Street firms.
Kevin Kabat, chief executive officer at Fifth Third, Ohios largest bank, and BB&Ts Kelly King told a New York investor conference yesterday they have a chance to reinvest fresh cash from lower-yielding investments as government debt pays the most since 2011. Unlike JPMorgan Chase & Co. or Bank of America Corp., the two biggest U.S. lenders, their firms hold fewer securities subject to markdowns as long-term rates rise.
Higher rates would help bring relief to bankers whove seen lending margins squeezed and expenses pushed up by new technology and regulations. The Federal Open Market Committee is debating whether the economy is strong enough to justify tapering the central banks monthly purchases of about $85 billion in bonds, a maneuver intended to stimulate growth by keeping borrowing costs low.
If youre a bank that takes in deposits and lends money out, youre probably going to appreciate a steeper curve more than an institution that focuses more on trading, Scott Warman, treasurer of Buffalo-based M&T Bank Corp., said in an interview last week. A steeper curve creates more profit margin for bank, or spread between what they pay for short-term deposits and the longer-term yields they earn on lending and investments.
Were clearly heading for a steeper yield curve thats going to give reinvestment opportunities, King said at yesterdays Barclays Global Financial Services Conference.
Others see a waiting game. Our forecast doesnt show short rates moving until at least the latter part of 2014 and probably into 2015, Regions Financial Corp. Chief Financial Officer David Turner, who helps run Alabamas largest lender, said at the conference. But we do benefit from the steepening of the curve.
Smaller banks have outperformed the largest lenders since midyear. The KBW Bank Index, comprised of the 24 biggest firms, gained 2.85 percent this quarter through last week. The 50- company KBW Regional Banking Index added 4.95 percent and the 391-company Nasdaq Bank Index, which includes smaller community lenders, rose 3.65 percent.