July22,2019 BARRON’S 13
Fortified
These are among the banks expected to be better positioned for a Fed rate cut,
thanks in part to a lower percentage of variable-rate loans versus some peers.
Recent Market Dividend 1-Year
Company / Ticker Price Value (bil) Yield ReturnKeyCorp / KEY $17.41 $17.3 3.9% -11.0%
Signature Bank / SBNY 123.07 6.9 1.8 0.
U.S. Bancorp / USB 55.18 85.9 2.7 12.
Note: data as of July 18 Source: FactSet
The prospect of rate cuts is pressuring regional banks,
some unfairly so. By Lawrence C. Strauss
Fight the Fed
With These Stocks
REGIONAL BANK STOCKS AREN’T GETTING MUCH RE-
spect. Blame the Federal Reserve.
Banks typically benefit when the Fed boosts
short-terminterestratesbecausewhattheyearnon
their assets, most notably loans, increases faster
than what they pay on their liabilities, mainly de-
posits—liftingtheirnet-interestmargins,orNIMs,
andincome.Butwhenratesdecline,asisexpected
after the central bank’s rate-setting committee
meets later this month, the reverse can occur.
Against this backdrop, the KBW Regional
BankingIndexisup11%thisyear,comparedwith
20% for the S&P 500 index. And regional bank-
stockvaluationsremainpressured,recentlytrad-
ingatabout1.5timestangiblebookvalue—wellbe-
low their levels of about three times before the
financial crisis a decade ago.
This discount comes despite generally strong
credit quality in regional banks’ loan portfolios.
“There’s just no love for the banks,” says Lisa
Welch, portfolio manager of the John Hancock
Regional Bank fund (ticker: FRBFX).
Manyregionalbanksareparticularlysensitive
tofallinginterestratesbecausetheyhave“ahigh
concentrationofcommercial-orientedloans,”says
John Pancari, a bank analyst at Evercore ISI.
Many of those loans have variable rates, often
pegged to the London interbank offered rate, a
common rate benchmark, or the prime rate, he
adds.One-monthLiborwasrecentlyat2.3%,down
from 2.52% at the end of December.
But how sensitive abankistodecliningratesvar-
ies,dependingonthecompositionofitsloanportfo-
lio and deposits. This presents an opportunity for
investors who are willing to do a little digging.
Foranasset-sensitivebank,assetyieldsreprice
fasterthanliabilityyields.Suchbankstypicallyhave
alotofvariable-ratecommercialloansandasignifi-
cant amount of noninterest-bearing deposits.
At SVBFinancialGroup (SIVB)and Comer-
ica (CMA),about90%oftheirloanswerevariable-
rateasofMarch31—atthehighendofthegroup’s
range.Thesetwobanksandmanyothersareusing
hedging strategies to mitigate the interest-rate
risk.Thosestrategiesincludeinterest-rateswaps,
though“mostbanksarelatetothegameinterms
of reducing their asset sensitivity,” Peter Winter,
a bank analyst at Wedbush, wrote recently.
Still,“theless-asset-sensitivebanksarebetter
positioned to weather the storm,” says Pancari.
In contrast, liability-sensitive banks typically
have liabilities, notably deposits, whose yields re-
price faster than their asset yields—often due to
higher-costdepositsandloanswithlongermaturi-
tiesthanvariable-ratecredits,whichresetregularly.
That’s more desirable when rates are falling.
Themarkethastakennoticeofthisgrowingdi-
vide.Theliability-sensitivebanksgenerallysport
highervaluationsthantheasset-sensitiveonesdo.
Bankanalysts,however,havetopratingsonasset-
sensitive and liability-sensitive firms alike.
“Banks can do things to protect their balance
sheets,”saysHancock’sWelch,pointingtohedging
and noting that solid loan growth can offset at
least some pressure on the net-interest margin.
“Credit trumps interest rates, to my mind.”
Nevertheless, given the pressure on margins,
it’simportanttobeawareofabank’sbalance-sheet
makeup.WedbushforecaststhattheNIMsofthe
regionalbanksitcoverswillbe3.34%attheendof
the year, down from 3.42% as of March 31.
OnebankWinterthinksissomewhatinsulated
from falling interest rates is KeyCorp (KEY),
thanksinparttosomesavvyhedging,includingin-
terest-rate swaps and floors that protect against
ratesgoingbelowanagreed-uponlevel.Byusing
those hedges, KeyCorp was “willing to give up
somerevenue,butit’sreallybenefitingtheminto-
“The less-asset-
sensitive banks
are better posi-
tioned to
weather the
storm.”
John Pancari,
bank analyst at
Evercore ISI