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Will Rising Rates Buoy Bank Stocks?

Some will benefit more than others from higher interest rates, but for the most part, those future gains are already priced into their shares.

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Erin Davis: A lot of investors ask us whether now is the right time to buy bank stocks, with interest rates likely to rise in 2015. We think the answer is more complicated than it may first appear.

First, it's important to know that interest rates themselves don't drive bank earnings. What we look at is net interest margins. Net interest margins are the difference between the interest income that banks earn on their assets and the expense they pay to fund their liabilities. This tends to be much more stable over time than interest rates themselves.

That said, as interest rates have approached zero for a long time, net interest margins have gotten squeezed. People don't generally pay the bank to take their deposits, and so there is some room for net interest margins to rise when rates do eventually increase.

We think some banks are better positioned than others to take advantage of this increase. Of the U.S. big four, we think that JPMorgan (JPM) is the most well positioned. It has a lot of deposits ready to deploy when interest rates do rise.

We also think that U.S. regional banks with good deposit bases--and especially those with non-interest bearing deposits--are going to see a nice bump in earnings when interest rates rise. Banks like this are Comerica (CMA), BOK Financial (BOKF), as well as the U.S. trust banks, such as State Street (STT), BNY Mellon (BK), and Northern Trust (NTRS).

Overall, we do think that banks are going to benefit as interest rates rise; some more than others. But we think that a lot of this is already priced into their shares.

Erin Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.