6 bank stock plays for Operation Twist

The Fed's latest maneuver may be bad for banks in the long term, but there are some defensive picks.

By TheStreet Staff Sep 22, 2011 10:48AM

By Dan Freed, TheStreetTheStreet

 

Wells Fargo (WFC), JPMorgan Chase (JPM), SunTrust Banks (STI) and City National Corp. (CYN) are the banks best positioned for a flatter U.S. Treasury yield curve now that the Federal Reserve has flattened it in a move dubbed Operation Twist, according to a research report published Wednesday by Evercore Partners.

 

There had been widespread speculation that the Fed would perform Operation Twist -- which aims to raise short-term interest rates while pushing down long-term rates -- before the Fed officially announced the plan Wednesday. The hope is that the move will attract foreign capital while keeping financing costs low, the Evercore report stated before the Fed made the move official.

 

Overall, Operation Twist would be bad for banks in the long term because it would negatively affect net interest margins, which represent the difference between banks' cost of capital and what they can charge borrowers.

 

However, it could offer short-term benefits to banks by allowing them to get better returns on new cash coming onto the balance sheet from maturing loans. Those loans have been viewed by the market as having a high "reinvestment risk," because the cash must be reinvested at lower yields than the older loans had been generating.

 

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Banks likely to see the "greatest relief to downside reinvestment risk include those with larger portfolios but shorter durations and a higher concentration of securities maturing in three years," the report states. Examples of such banks include SVB Financial Group (SVB), City National and Commerce Bancshares (CBSH).

Still, Wells, JPMorgan, SunTrust and City National are the best positioned for the new environment because they have "greater top-line diversification and above peer (balance sheet) growth prospects," according to the report.

1Comment
Sep 25, 2011 6:04PM
avatar
Everything this administration does "for" the economy seems to be aimed for short-term boost at the expense of long-term consequences.  Is the idea simply to get to 2012 before the economy collapses?  The "Tea Baggers" are right.  Fundamental change is necessary.  The status quo will not work and has not worked since govt began its massive, cancerous growth pattern post-WWII.  Even after the costs of WWII, the federal debt accumulated from 1776-1945 (The USA inherited and decided to honor the $ 75 mil debt created largely by the American Revolution) on 6-30-45 stood at $ 258.3 Billion.  That is @ one average month's deficit this year.   The federal debt is now well over 55 times as high as it was in 1945.    EVen adjusting for inflation, that is insane.
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