Bank investors cheer the New Year and Higher Rates
2013 was a good year for Bank Investors and most believe so 2014 will be. Higher rates shouldn’t put a damper on the party as Banks remain much lower then historical valuations. While higher rates have brought Mortgage refinances to a screeching halt, many bankers are hopeful of higher rates and believe the low rates have actually done the opposite of what was intended. Higher rates and a steeper yield curve will start to fatten net interest margins between the rate banks pay depositors for funds and the rate they lend at. Banks have been preparing for higher rates.
It may seem counter intuitive but with rates as low as they lie today you’d think banks would have an excellent net interest margin spread and be able to lend widely. The problem is that with rates as low as they are if defaults rise the Fed does not posses the ability to bail out banks by lowering rates. Rates have bottomed. Losses at these levels will only be magnified with higher rates.
The other reason to cheer is that higher rates mean an improved US economy and that is also good news for the Big Banks like Bank of America (BAC), JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC). An improved economy will mean higher employment higher bank balances and more customers to buy housing in the future even at higher rates. Read more in an article in Financial Times By Tom Braithwaite