The Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point last week and signaled that a similar hike could be on the cards in July — the boldest statement yet of its intent to combat soaring inflation. The hike was the Fed’s largest since 1994 and sent the benchmark funds rate to a range of 1.5%-1.75%, the highest level since Mar. 2020 when the Covid pandemic began in earnest. Some market watchers believe this could mark the start of an aggressive rate hike cycle reminiscent of 1994. In just 12 months from Feb. 1994, the Fed nearly doubled its main policy rate to 6% in seven rapid-fire hikes that included one 75-basis-point hike in November. But although rising interest rates typically benefit bank stocks, the KBW Bank Index — which tracks the performance of major banks and thrift institutions — is down 24% this year, as investors weigh the growing risks of a recession with potential gains in margins from higher borrowing costs. To find out which banking stocks could do well if the Fed revisits its 1994 playbook, CNBC Pro screened the S & P 1500 index for U.S. bank stocks whose share prices rose more than 10% in the 12 months after Feb. 1994 and are expected to grow their net interest income by at least 10% this year. The stocks that turned up on the screen are also buy-rated by the majority of analysts, who expect them to rally at least 30% over the next 12 months, according to FactSet data. Stocks that made the screen Five U.S. banks made the screen. Shares of Charles Schwab rose 17.7% in the 12 months after Feb. 1994. It is expected to grow net interest income by over 30% this year, and 60% of analysts covering the stock have a buy rating on it, giving it potential upside of 55.2% over the next 12 months. SVB Financial Group — parent of technology-focused Silicon Valley Bank — also showed up on the screen. The stock gained over 45% during the 1994 rate hikes and is expected to increase its net interest income by more than 70% this year. Analysts covering the stock have a consensus potential upside of 71.2% on the stock. New Jersey-based regional bank Valley National Bancorp made the list too. Shares in the bank soared more than 13% in the 12 months after Feb. 1994. The bank is expected to grow its net interest income by 27.3% this year and analysts give the stock potential upside of 42%. The other U.S. bank stocks that made the screen were First Bancorp and Cadence Bank . Importance of net interest income Net interest income is a financial performance metric that reflects the difference between the revenue generated from a bank’s interest-bearing assets and the expenses associated with paying its interest-bearing liabilities. Bank stocks generally do well in a rising interest rate environment as the interest income earned by banks from loans and investments rises faster than what they pay for funding. The higher interest rates are, the greater the net interest income banks earn. But rising interest rates also carries inherent risks. For one, there could be a massive sell-off in bonds. The Fed’s rate hikes in 1994 led to what has been referred to as the “great bond massacre” of 1994, when more than $1 trillion was wiped off the fixed income market by Nov. 1994. An overly aggressive rate hike cycle could also tip the economy into a recession, leading to less borrowing and potentially higher defaults as consumers and businesses struggle to make repayments.
These bank stocks did well during the 1994 Fed rate hikes — and could be about to do so again
