Banking, finance, and taxes

Deutsche Bank Says 3 Bank Stocks Best Pure Play on Rising Rates

Lee Jackson

Published: December 2, 2015 8:20 am

Last Updated: January 13, 2020 4:35 pm

In two weeks the Federal Reserve is expected to raise interest rates for the first time in over eight years. The market is pricing in a 75% probability for the Fed liftoff on December 16, and barring a major international or domestic crisis, that figures to be a go. A new research report from Deutsche Bank takes an in-depth look at how various banks will be affected, and it highlights three that could trade strong initially and sustain forward gains.

Deutsche Bank, like almost everybody on Wall Street, agrees that the first rate hike will be 25 basis points, or one-quarter of 1%. While this really won’t have a huge initial effect on net interest margins and drive them higher, the analysts do note that some banks are more levered to rising medium and long-term rates.

The Deutsche Bank analysts see three top banks as being the purest plays on rising short-term rates, and they think they could see solid gains.

Bank of America

Bank of America Corp. (NYSE: BAC) has continued a methodical march back to financial health and is a true big money center bank to make the list at Deutsche Bank. It is the fifth largest bank in the world by market capitalization and is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. Operating 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platforms, the company continues to open new markets and expand share, and the Merrill Lynch brokerage arm has continued to supply the bank with outstanding revenues and growth.

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CEO Brian Moynihan met with Wall Street and many came away feeling good about the overall outlook for the bank. With the potential for strong commercial lending and credit card originations, and trading at just over 11 times 2016 estimated earnings, the stock makes good sense now. Deutsche Bank cites the bank’s good expense management, loan growth and the valuation as positives.

Bank of America investors receive a 1.14% dividend. The Deutsche Bank price target for the stock, which is rated Buy, is $19. The Thomson/First Call consensus price target $18.73. The stock closed on Tuesday at $17.81.
Citizens Financial

This top super-regional bank is also rated Buy at Deutsche Bank. Citizens Financial Group Inc. (NYSE: CFG) is one of the nation’s oldest and largest financial institutions, with $131.3 billion in assets as of the end of the third quarter. It offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. With 3,200 ATMs and approximately 1,200 Citizens Bank and Charter One branches in 11 states in the New England, Mid-Atlantic and Midwest regions, the company is a dominant player in those areas.

The company also offers corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest hedging, leasing and asset finance, specialty finance and trade finance.

According to Insider Monkey, a whopping 56 hedge funds owned the stock at the end of the third quarter, making it among the financial favorites. The Deutsche Bank analysts love the attractive valuation, excess capital and the above-average exposure to rising interest rates.

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Citizens Financial investors receive a 1.51% dividend. The Deutsche Bank price objective is $27, while the consensus target is higher at $27.93. Shares closed most recently at $26.50.

First Horizon National

This smaller cap stock is only rated Hold at Deutsche Bank, but they do think the bank is well positioned for higher short rates. First Horizon National Corp. (NYSE: FHN) provides financial services through more than 170 bank locations in and around Tennessee and 26 FTN Financial Group offices in the United States.

The company was founded during the Civil War in 1864 and has the 14th oldest national bank charter in the country. FTN Financial is a capital markets industry leader in fixed income sales, trading and strategies for institutional customers in the United States and abroad.

While Deutsche Bank thinks the stock could respond well to the initial interest moves, the firm does caution that the bank seems fully valued at current levels, the forward estimates may be aggressive and revenue growth has remained sluggish.

First Horizon investors receive a 1.61% dividend. The Deutsche Bank price target is $15, and the consensus target is $15.10. Shares closed on Tuesday at $14.90.

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While there may not appear to be huge upside to the price targets, any positive reactions by the stocks to the interest rates increase could very easily send the analysts scurrying to raise their targets. In the meantime, the two stocks rated Buy are excellent additions to growth portfolios now.