City National Corp (CYN): How the End of QE3 Will Affect These Banks

However, higher funding of lending activities through non-interest bearing core deposits, which constituted 73% of total deposits at end of the first quarter, should offset any increase in SVB Financial Group (NASDAQ:SIVB)’s interest cost on higher Federal funds rates.

The variable interest rate loan portfolio and higher yields, should enable SVB Financial Group (NASDAQ:SIVB) in expanding its NIM, partially offsetting the investment losses, and possibly allowing the company to sustain its ROA close to 0.74% (the level achieved during the first quarter).

Foolish bottom line

Small Banks like City National Corp (NYSE:CYN), East West Bancorp, Inc. (NASDAQ:EWBC) and SVB Financial Group (NASDAQ:SIVB) should benefit from the improvement in U.S. economy and the resultant increase in the Federal funds rate. These banks’ lending activities revolve primarily around the U.S. mortgage, housing market and providing commercial loans to enterprises.

The variable interest rates of such loans implies that any increase in interest rates will directly translate into higher interest income and expansion in the NIM of National City, increasing its ROA closer to 1% and ROE to above 9%.

Ashit Gulati and Equity Dimensions has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Wal-Mart Stores, Inc. (WMT): This Grocer Is Expanding its Reach

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