Last week, the Federal Reserve announced the end of its quantitative easing (:QE) or bond-buying program after almost six years. Presently, the debate on its effectiveness in achieving the set goal has taken center stage. Also, the market is now abuzz with speculations about the timing of the rate rise.
Whatever the outcome of this program or whenever the rates rise, some big banks will continue to benefit from the actions. But how is that possible?
When the Fed had started the QE program six years back and lowered the interest rates to near zero, the economy was in a mess – with a significantly high unemployment rate, plummeting housing and financial markets and lower consumer spending. The primary aim of the Fed’s stimulus plan was to stabilize the U.S. economy and spur growth, primarily by revitalizing the large banks.
Apart from aiding the Fed in stabilizing the economy, these banks also benefited from the program. With the Fed injecting money into the economy, banks had more money to lend and earn from that. However, the lending activities failed to rise significantly owing to other reasons.
Large banks further benefited from low rates as their borrowing cost declined, which led to a fall in the overall interest expenses. Moreover, since banks were not able to lend up to their full capacity, they parked the extra funds with the Fed and earned billions in interest income.
The QE led the Fed’s balance sheet swell to more than $4 trillion. Presently, the Fed plans to maintain this balance till the rates rise.
However, since it’s not feasible to unload these funds at one go, as it would cause an oversupply of money in the economy – leading to another collapse. So the Fed would possibly continue paying incentive (higher rates) to banks for keeping their additional money with it and not withdrawing the same for lending activities.
On the other hand, when rates finally rise, banks will benefit from improvement in net interest income.
3 Banks to Continue Benefiting
Here are three banks that benefited from the QE and will continue to benefit even after the program ends. Also, the fundamentals of these banks appear quite strong. So it’s a good idea to add these stocks to your portfolio.
BankUnited, Inc. (BKU)
Headquartered in Miami Lakes, FL, it is a bank holding company and conducts operations through three wholly owned subsidiaries. The company offers various banking products and financial services to commercial and middle-market businesses as well as individual customers, primarily in the Florida region.
- Delivered positive earnings surprises in the trailing 15 quarters
- LT Growth Rate: 8.9%
- FY2014 Estimate Revision (4 weeks): 2.7%
- Zacks Rank #3 (Hold)
The PNC Financial Services Group Inc. (PNC)
Headquartered in Pittsburgh, it is one of the major financial services organizations providing consumer and business banking. The company is engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking.
- Delivered positive earnings surprises in the trailing 15 quarters
- LT Growth Rate: 6.9%
- FY2014 Estimate Revision (4 weeks): 0.4%
- Zacks Rank #3
SunTrust Banks Inc. (STI)
Based in Atlanta, GA, it is a diversified financial services holding company. The company operates through its principal banking subsidiary SunTrust Bank, which provides various financial services to individuals and corporate customers in the U.S.
- Delivered positive earnings surprises in 12 of the trailing 15 quarters.
- LT Growth Rate: 18.2%
- FY2014 Estimate Revision (4 weeks): 6.5%
- Zacks Rank #3
Moving Forward
With solid growth in GDP and consumer spending, rebound in housing market, and a decline in unemployment rate the U.S. economy currently shows a decent progress. Consequently, we expect demand for loans to increase, supported by higher businesses investments. Hence, these banks should see better days going ahead.
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