as mentioned to some clients before, the rise of interest rates will benefit banks greatly.
Given the current context, it's good to pick up some banking shares. Since it is not so possible to know if it is the lowest price, it is better to spread the purchases over a range of prices.
for your reading pleasure
Rate Increases Help Banks First
Data on past Fed moves show interest on deposits rises more slowly than on loans
| ENLARGE A rate increase would benefit lenders more than savers. PHOTO: SUPERSTOCK/EVERETT COLLECTION By JAMES STERNGOLD Sept. 16, 2015 7:55 p.m. ET When the Federal Reserve ultimately raises interest rates, banks will get more out of it than savers will. Consumers have been anxiously awaiting a bump in rates to lift the interest on their deposits from near zero. But an examination of the data from previous rate increases shows that deposit rates may not move much at all, even as rates on some loans climb almost immediately. In periods of rate increases by the Fed over the last two decades, the average interest paid on deposits rose by only about 0.25 percentage point over the first year, according to data provided by Bankrate.com. Over the same period, the rates on 30-year fixed-rate mortgages increased by more than twice as much, and the prime borrowing rate, a benchmark for everything from credit cards to home equity lines of credit, rose by eight times as much. The result for consumers is the flip side of the fillip bank profit margins are expected to get when interest rates go up. When rates rise, banks push up the rates they charge for loans much more quickly and further than what they pay depositors for their funds. The Fed is expected to lift its benchmark interest-rate target from near zero this year. Expectations that it could do so when it meets Thursday have eased, though it would have other opportunities in October and December. Consumers have been collecting little interest on their savings since the Fed moved rates to near zero in December 2008. There is some reason for optimism as the central bank prepares to reverse course. According to Bankrate, depositors were getting 0.3 percentage point a year in interest on the average money-market deposit account, higher than the current fed-funds-rate target of 0-0.25 percentage point. In the last three rate-increase campaigns, deposit rates stood below the fed-funds rate. Eventually, some experts and bank executives also say that savers may see more of a deposit-rate increase than they have in the past, especially if the Fed's short-term target ultimately goes up by a half percentage point or more. Many economists forecast a quarter-point increase to start. In 2006, banks passed along 17% of the increase in rates to depositors over the next year, said Erika Najarian, head of U.S. banks equity research at Bank of America Corp.'s BofA Merrill Lynch Global Research. This time, the figure could rise to 30% or so, she said, in part because of new rules that encourage banks to hold more retail deposits and the ease with which consumers can now switch to higher-yielding accounts thanks to the prevalence of banking on mobile phones and computers. J.P. Morgan Chase & Co.'s chief financial officer, Marianne Lake, also has said that the lag might be shorter than in the past for depositors. "We are expecting retail deposits to reprice higher and faster in this cycle," she said on a July conference call. But any predictions may turn out to be premature. Few know how consumers will react to rates moving off a level that has been at a historical low for more than a half decade. The Fed also may move slowly, increasing rates by only a very small amount, or not at all. If the economy slows down or global market jitters from China put a chill on confidence and the U.S. economy, the Fed may resist rate increases, leaving savers in the familiar position of earning very little. "I don't think you're going to see much of a change in what banks pay depositors until the Fed's second rate move," said Scott Hildenbrand, a principal at Sandler O'Neill + Partners. He says rates would likely have to move by one percentage point, or four increases of the type some investors expect Thursday, before it makes much of a difference to depositors. That scenario "could take a year or more," said Donald Musso, an investor in a number of community banks and chief executive of New Jersey-based FinPro Inc., a bank consulting company. The initial rate increase, for savers, "will be ho-hummish." Banks are expecting to gain from the strategy of holding down the cost of what they pay depositors while charging more for loans. In its second quarter earnings report in July, BB&T Corp., of Winston-Salem, N.C., calculated that if it increased the prime rate it charges borrowers by one percentage point, its net interest income would rise 1.6%. Many midsize and smaller banks will look at the large banks for direction. "The largest banks, when they move, will have an influence" on the rest of the industry, said Dick Evans, chairman and CEO of Cullen/Frost Bankers Inc. "There's no question that an adjustment in the [Federal funds] rate upwards would be quicker on loans than deposits." —AnnaMaria Andriotis contributed to this article. |
Taken from : http://www.wsj.com/articles/rate-increases-help-banks-first-1442447705
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