Interest rates are rising, and financial stocks are the natural place to be. The higher interest rates go, the more interest banks collect, holding everything else constant. Sometimes interest rate hikes can cause recessions, which aren’t good for banks, as they result in fewer loans being issued. But if rates go up while the economy performs reasonably well, that can result in a large increase in bank profits. In this article, I will explore three bank stocks that could profit off the rising interest rates we’re seeing this year.
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Bank of America
Bank of America (NYSE: BAC) is a U.S. bank stock I started buying last year. It’s one of America’s biggest banks, and it put a good quarter behind it last quarter. In the fourth quarter, BAC delivered a 29% increase in net interest income (“NII”) and a 3.8% increase in earnings per share. NII is a bank-specific earnings metric that means loan interest minus deposit interest. Weakness in non-lending parts of the business (e.g., investment banking) prevented BAC’s big NII jump from translating into a similarly big increase in earnings.
However, earnings nevertheless increased somewhat, which is not something all companies managed to pull off in the fourth quarter. The interest rate increases that have been happening, have taken a bite out of the performance of non-banking stocks (especially technology stocks). Bank of America collects more interest than it pays, so it benefits from the rate hikes instead of being harmed by them.
TD Bank
The Toronto-Dominion Bank (TSX: TD) is a Canadian bank stock I’ve owned for several years now. I started buying it in 2018, and I’ve been adding to the position ever since then.
Much like Bank of America, TD put out a good quarter last quarter. In it, the bank’s revenue went up 35% and its earnings went up 76%. Adjusted earnings, which may be more accurate, only went up 5% – which is still better than the average company in Q4. It was a pretty good quarter.
One big thing that TD has going for it this year is acquisitions. It is currently buying out First Horizon and Cowen, two banks based in the United States. These banks together will add about $1 billion per year in earnings power to TD bank. The bank recently got all the approvals it needed to buy Cowen. First Horizon remains a work in progress, but most experts expect the deal to close soon.
Postal Savings Bank of China
Postal Savings Bank of China (OTC: PSTV.Y) is a foreign bank based in, you guessed it, China. China is actually lowering interest rates this year rather than raising them, so it doesn’t have the tailwind that TD and BAC currently have. However, it has something they don’t: truly outrageous cheapness. At today’s prices, PSTV.Y trades at:
- 6.2 times earnings
- 1.4 times sales
- 0.5 times book value
The book value ratio is really crucial here: this stock trades for less than the value of its assets minus debt! This looks like an undervalued situation, one I’m very excited about.
