Rising interest rates have rattled the stock market in the opening months of 2018, but bank investors aren’t too concerned. Many banks will get an earnings boost from higher rates, but analysts say JPMorgan Chase & Co. (NYSE: JPM) could be one of the biggest long-term winners.
Traditional banks make money thanks to net interest margin, which is the difference between the interest rates the banks charge on their loans and the rates they pay out for their deposits. While both rates are on the rise at the moment, higher interest rates give banks more wiggle room to expand the margin, allowing for more profitability.
After nearly a decade of government-mandated bank balance sheet improvements, most U.S. banks are well-positioned to capitalize on the current environment. However, JPMorgan is in a unique position among its peers.
“The firm’s diversified business model stabilizes results, increases customer switching costs and allows the company to generate more revenue per dollar of assets than smaller peers,” Morningstar analyst Jim Sinegal says.
JPMorgan ended 2017 with a healthy Tier 1 ratio of 12 percent. Tier 1 ratio the ratio of a bank’s core equity capital to its risk-weighted assets and is a key metric for assessing the health of a bank’s balance sheet. Sinegal says the bank has more than half a trillion dollars in high-quality liquid assets.
In addition, JPMorgan has had tremendous success with the launch of its Sapphire Reserve card, which has resulted in millions of new account openings.
“The Federal Reserve also appears set to continue a slow and steady program of interest rate increases, which should contribute up to $2 billion in additional net interest income if the yield curve rises by just 100 basis points,” Sinegal says.
Bank of America analyst Erika Najarian says there are specific traits investors should look for in bank stocks when yield curves steepen.
“In our opinion, banks best positioned to outperform earnings expectations this year have greater exposure [to] the short duration [bonds] and more importantly, a strong deposit base,” Najarian says.
Bank of America named JPMorgan and Zions Bancorp (ZION) as its top two rising-rate bank stocks. Bank of America has…
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