In a recent report, Bank of America analysts addressed the uncertain interest rate environment in 2015 and expectations for rate-sensitive stocks. The report indicates that rate sensitivity has been a major concern of investors lately, and that the market seems to expect a rise in interest rates coming at some point in the near future.
It's All About The Fed
The first upcoming potential rate-related catalyst is the Federal Reserve meeting next week. Members will discuss, among other things, dropping the phrase “considerable time” from the language used to describe the duration of the low-rate environment.
Bank of America analysts believe that consensus estimates for regional banks are already based on the forward yield curve projections of a 53 basis point (bp) increase on Fed funds by the end of 2015 and a 141 bp increase by the end of 2016. However, analysts see an increase in short rates providing a psychological boost for bank investors.
Rate Sensitivity
Certain banks have an asset base that is more sensitive to changing interest rates than others. Bank of America uses a 10-factor asset sensitivity score to estimate how much of an effect changing rates will have on the balance sheets of banks.
Analysts discovered that the five most rate-sensitive large-cap banks included in their analysis underperformed the market in 2014. Four of the five most rate-sensitive large-cap stocks (M&T Bank Corporation MTB, Regions Financial Corp RF, KeyCorp KEY, Comerica Incorporated CMA and Zions Bancorporation ZION) are down year-to-date in 2014.
For investors that believe that interest rate hikes will provide a big boost for banks, Comerica and Zions lead the group in rate sensitivity.
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