U.S. Bank Stocks Surge Toward Best Year Since 1997 on Fed Shift

(Bloomberg) -- U.S. bank stocks are on track for the biggest annual gain in more than two decades as traders increase bets that the Federal Reserve will start raising interest rates as soon as late next year, promising to boost lenders’ profits. 

The KBW Bank Index jumped 2.9% on Monday after 10-year Treasury yields touched the highest level since June on expectations that the Fed is moving closer toward tightening monetary policy as the economy recovers from the pandemic. The advance pushed the index to a gain of 37% this year, the most since 1997. 

READ: Treasury 10-Year Yield Tops 1.5% for First Time Since June

Investors began piling back into bank shares last week after the Fed’s latest dot plot showed 9 of 18 officials anticipate a rate hike next year, up from seven in June, and Chair Jerome Powell said the central bank may soon begin scaling back its massive bond purchases. 

Higher interest rates would provide a boost to banks’ bottom lines by increasing earnings on long-term loans. 

“Recent commentary about both tapering and a potential 2022 rate hike prove positive tailwinds” for asset sensitive banks, Hovde Group analysts include Brett Rabatin wrote in a note.

All 24 members of the KBW Bank Index have gained at least 3.5% since the Fed’s Sept. 22 meeting, with half of shares rising 10% or more over the four-day rally. Dallas-based Comerica Inc. has been the best performer, jumping about 15%. 

But Wells Fargo & Co. has lagged its peers and was the lone decliner on Monday after the bank reached a settlement with the U.S. Justice Department over claims it overcharged commercial customers who used its foreign exchange services.

While the Fed’s next meeting is not until November, the next major catalyst for banks is just over two weeks away, with JPMorgan Chase & Co. scheduled to kick off the third-quarter earnings season on Oct. 13.

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