Financial stocks closed on Wednesday echoing the mixed results of banks’ fourth quarter earnings, but they may be positioned favorably to capitalize on the anticipated interest rate hikes this year.
Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo, which completed the sale of its asset management division at the beginning of the fourth quarter for $2.1 billion, all posted better-than-expected fourth quarter earnings over the last week.
The financial sector is poised to benefit from higher rates through increased profit margins, particularly banking giants that are loaded with U.S. deposits and most sensitive to U.S. interest rate changes.
Wells Fargo and Bank of America both calculate that they could earn more than $7 billion in additional annual revenue if there were a one percentage point jump in both short- and long-term rates at the same time, and JPMorgan would gain $6.7 billion in revenue, according to the Wall Street Journal.
When interest rates are higher, banks are uniquely situated to profit from charging more on loans. In addition, lenders can further increase profits by taking their time increasing the amount they pay depositors.
With the money infused into the economy in recent history, for much of the last two years, consumers and businesses have had lower demand for lending.
When looking at S&P 500 ETFs, equally weighted strategies, such as the Invesco S&P 500 Equal Weight ETF (RSP) and the Invesco ESG S&P 500 Equal Weight ETF (RSPE), offer greater exposure to the financial sector compared to their market cap-weighted counterparts.
Currently, RSP holds 19.64% of its assets in financial securities, trailed by the electronic technology sector at 9.42%.
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