Higher rates and lower corporate tax boost U.S. bank stocks

These banks have strong fundamentals and a long growth runway.

Vikram Barhat 27 June, 2018 | 5:00PM
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For the second time this year, the U.S. Federal Reserve ratcheted up the benchmark interest rate by a quarter percentage point, from 1.75% to 2%, on June 13. The central bank's aggressive approach to rate hikes is a clear indication of the governments' confidence in the resilience of the U.S. economy and the strength of its job market. In fact, the Fed has already hinted at the possibility of two more rate nudges before the end of the year.

The uptrend in interest rates and the economic factors contributing to it are a positive for the banking sector. The S&P Banks Select Industry Index is up nearly 4% so far this year compared to just over 3% gains for the S&P 500 index, as of June 22. While rising rates tend to cause a strain on borrowers, for lenders they create a tailwind of profitability and earnings as the cost of borrowing ticks higher.

Additionally, now that corporate tax rates in the United States have shrunk to 21% from 35%, the biggest banks are enjoying a cash windfall worth billions of dollars, no small portion of which is falling to the bottom line.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Citigroup Inc71.18 USD0.42Rating
JPMorgan Chase & Co163.04 USD1.15Rating
U.S. Bancorp59.79 USD0.84Rating
Wells Fargo & Co47.92 USD0.25Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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