The Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point last week and signaled that a similar hike could happen in July – its boldest statement of intent to combat soaring inflation. . The increase was the Fed’s biggest since 1994 and brought the benchmark fund rate to a range of 1.5%-1.75%, the highest since March 2020 when the Covid pandemic began in earnest. Some market watchers believe this could mark the start of a strong rate-raising cycle reminiscent of 1994. In just 12 months since February 1994, the Fed has nearly doubled Its key policy rate rose to 6% in seven rapid increases including a 75-basis point hike in November. But while rate hikes are often in favor of bank stocks, the Banks Index KBW – which tracks the performance of major banks and thrifts – is down 24% this year, as investors weigh the growing risks of a recession against the potential returns from borrowing. higher cost. To find out which bank stocks might do well if the Fed looked back at the 1994 books, CNBC Pro examined the S&P 1500 index for US bank stocks whose share prices have risen more than 10% in the past year. 12 months after February 1994 and are expected to increase their net interest income by at least 10% this year. The stocks that appear on the screen are also rated as buy by the majority of analysts, who expect them to rise at least 30% over the next 12 months, according to FactSet data, according to FactSet data. Stocks made screens Five US banks made screens. Shares of Charles Schwab rose 17.7% in the 12 months after February 1994. It is expected to increase net interest income by more than 30% this year and 60% of analysts on the stock have a rating. buy into this stock, giving it upside potential. is 55.2% over the next 12 months. SVB Financial Group – the parent company of the technology-focused Silicon Valley Bank – also appeared on the screen. The stock rallied more than 45% during the 1994 rate hike and is expected to grow net interest income by more than 70% this year. Analysts say the stock has a consensus potential gain of 71.2% for the stock. New Jersey-based Valley National Bancorp regional bank also made the list. The bank’s shares rose more than 13% in the 12 months after February 1994. The bank is expected to grow net interest income 27.3% this year and analysts say the stock’s upside potential votes is 42%. Other US bank stocks that appeared on the screen were First Bancorp and Cadence Bank. Importance of net interest income Net interest income is a measure of financial performance that reflects the difference between the revenue generated from a bank’s interest-bearing assets and the costs associated with the payment of interest-bearing assets. interest payable by the bank. Bank stocks generally do well in a rising interest rate environment because the interest income that banks earn on loans and investments grows faster than they pay to get funded. The higher the interest rate, the larger the net interest income the bank earns. But rising interest rates also bring inherent risks. For one, there could be a massive sell-off in bonds. The Fed’s rate hike in 1994 led to what became known as the “big bond massacre” of 1994, when more than $1 trillion was wiped off the fixed-income market in November 1994. An overly aggressive rate hike cycle can also tip the economy into recession, leading to less borrowing and a higher likelihood of default as consumers and businesses struggle to repay their loans.
