This Sector Wins When Interest Rates Rise

Amanda Heckman|December 18, 2021

The Fed has spoken.

In this week’s main event, Jay Powell took to the stage to promise that a change is gonna come… next year.

He’s going to ever so carefully raise rates to put out the inflation dumpster fire and bring order back to our economy.

We say good luck… he’s going to need it.

You know who won’t need luck next year as Powell raises rates?

It’s a sector that’s been having a great year… and after the Fed’s latest meeting, it’s headed for an even better one in 2022.

Big Winners

Andy has repeatedly said that banks have been among the biggest winners this year (here, here and here). One big reason is their mountains of cash. They tightened lending during the pandemic, held onto cash to guard against defaults, and enjoyed record deposits as folks and businesses saved their pennies.

Some banks – like Wells Fargo, Bank of America and Capital One Financial – have used that cash to buy back shares and increase their dividend payouts. And they have seen their share prices soar…

They’re outperforming the market by a wide margin – each nearly doubling the S&P’s return… or better.

And with what’s on the horizon in 2022, these stocks are not going to come back to earth any time soon.

An Enviable Spot

Back in June, we wrote about what happens when companies are flush with cash…

They have a few things they can do with it. They can…

• Invest it in the business
• Pay it out in the form of dividends
• Use it to buy back shares of their own stock.

For banks, investing in the business means either expanding their reach or making more loans.

And sure enough, some bankers have said they plan to redeploy their cash into loans as soon as interest rates rise.

Here’s why banks will be in an enviable position as interest rates rise…

They’ll be able to start lending out money at higher rates, which will juice their revenues. Even a small increase in the lending rate could bring in billions of extra dollars.

Both Wells Fargo and Bank of America have reported that they could earn more than $7 billion in additional revenue with a 1 percentage point jump in rates.

Things will look good for shareholders… Wall Street’s expected 2022 earnings per share for big banks would be, on average, 19% higher if those banks added the projected gains that would come from a 1 percentage point rate move. For Wells Fargo, it would be a 38% boon.

For proof, let’s look back to the Fed’s last round of rate increases, which started in late 2015. Across the banking industry, net interest income grew 7% to 9% per year from 2016 to 2018, according to Barclays analysts.

You can see the effect in this chart…

We’re looking at billions more coming into banks’ coffers.

And here’s another reason banks will be the golden geese next year…

Since rates will rise gradually, banks won’t have to increase their deposit rates… at least for a while. That means they’ll bring in billions more in revenue without needing to pay any out to their customers.

Again, look to the last rate increase period. Banks generally didn’t increase their payments to depositors. They were “confident they had strong enough relationships to keep customers from chasing a few dimes every month,” per the The Wall Street Journal.

Funny how that works.

This sweet spot for banks in 2022 means the sector and its investors will have a very good year.

Note: As Powell begins raising rates next year, you’ll need to have your portfolio tuned in to the sectors and businesses that will outperform in a higher interest rate environment.

To get there, you couldn’t do much better than following the research of Manward’s own Alpesh Patel. With someone like Alpesh in your corner… someone who’s beaten the market by 580% over the last five years… who is a stock picker extraordinaire… and who was just honored by the queen for his financial talents… you could be sitting on your own mountain of cash in 2022.

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