On March 15, the Federal Reserve raised interest rates, for the second time in three months.
The Fed Funds rate, which is widely seen as a benchmark interest rate for a host of other types of loans, will increase to a target range of 0.75% to 1%.
Going forward, the Fed indicated it could raise interest rates as many as three times in 2017.
Higher interest rates will be a big boost to the banking industry because it allows banks to earn more money on the loans they charge to consumers and businesses.
When rates increase, the spread between interest paid on deposits, versus interest collected on loans, widens.
Rising rates help increase banks’ interest income, which is a major driver of profits. This is especially true for regional banks, which rely much more heavily on traditional banking activity, rather than on trading.
These three regional bank stocks could be big winners from the Fed raising interest rates.
Regional Bank Stocks: M&T Bank (NYSE: MTB)
M&T Bank is a regional bank in New York catering to banking customers in the Northeast.
At the end of 2016, it had $123.4 billion of total assets. It has 3.7 million customers, representing 5.9 million accounts. M&T has $95.5 billion of deposits, and is ranked either No. 1 or No. 2 in deposits, in seven of its 10 largest markets.
M&T does not engage in risky banking activities that got the financial sector into trouble in 2008. It avoided the mortgage-backed security boom-and-bust that nearly brought down the entire financial system.
In fact, M&T has not lost money in a quarter since 1976. Its stability has given M&T the ability to pay steady dividends for more than 30 years.
Last year, M&T’s earnings rose 4%, thanks largely to a 22% increase in net interest income. This shows the positive effect that rising interest rates are already having.
In addition, M&T is growing through acquisitions. It expanded its dominant position in the Northeast in 2015 by acquiring Hudson City Bancorp for $3.7 billion.
M&T stock trades for a reasonable valuation, with a P/E of 20 also offers a 2% dividend yield, making it one of our attractive regional bank stocks to buy now.
Regional Bank Stocks: Fifth Third Bancorp (NYSE: FITB)
Fifth Third Bancorp is headquartered in Ohio and does most of its business in the Midwest. As of Dec. 31, 2016, it had $142 billion in assets and operated more than 1,100 branches and 2,400 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia and North Carolina.
Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management. It also has a nearly 18% stake in Vantiv Holding.
Fifth Third is an attractive regional bank stock because it has largely sat out the huge rally in bank stocks since the election.
And, since the beginning of 2017, Fifth Third shares have declined 8%, compared with a 2% year-to-date increase for the Financial Select Sector SPDR ETF (NYSE: XLF).
This has kept Fifth Third cheap in a sector that is looking increasingly expensive. For example, Fifth Third stock trades for a P/E of just 12.
By contrast, the S&P 500 Index has an average P/E ratio of 26.
Plus, Fifth Third has a 2.2% dividend yield, which is slightly above average.
Fifth Third stock is getting unfairly punished, because the company’s financial results in 2016 look weak. Earnings per share fell 9% for the year, but this was mostly due to a large $469 million gain in 2015 when the company sold some of its interest in Vantiv.
Meanwhile, Fifth Third’s tangible book value rose 8% in the fourth quarter, which is a better indication that the company continues to create shareholder value.
Regional Bank Stocks: KeyCorp (NYSE: KEY)
KeyCorp, a regional bank in Cleveland, Ohio, has assets of approximately $136.5 billion.
Its main business functions are to provide deposits, lending, cash management, insurance and investment services to retail and commercial banking customers. KeyCorp operates in 15 states, through a network of more than 1,200 branches and more than 1,500 ATMs.
KeyCorp’s fourth-quarter earnings rose 25% year over year. The strong growth was due in part to KeyCorp’s $4 billion acquisition of First Niagara last year.
KeyCorp could be one of the biggest beneficiaries of higher interest rates. Its net interest income comprises a large portion of its overall earnings, and is growing rapidly. For example, KeyCorp’s net interest income jumped 19% in the fourth quarter, to $948 million.
The company generated a return on tangible common equity of 12.5% in the fourth quarter, which is very solid.
Immediately after the Fed announced its most recent interest rate hike, KeyCorp announced it would raise its own prime lending rate, from 3.75% to 4%. This is likely to help interest income continue growing in 2017.
This regional bank stock trades for a P/E of 21 and offers a 1.9% dividend yield.