PNC Financial Services (PNC), U.S. Bancorp (USB), & Huntington Bancshares Incorporated (HBAN): The Dilemma for Regional Banks

Rise in Rates will Help Margins But Hurt Lending Activity

Regional banks are hoping for a rise in interest rates to ease some of the margin pressure. However, banks face a dilemma. A rise in interest rates could have a negative impact on lending activity, especially given the fact that the recovery in lending activity is still in early stages.

Just to gauge the impact of rise in interest rates on lending activity, one needs to look at the latest mortgage applications data from the Mortgage Bankers Association (MBA).

For the week ended May 31, 2013, the MBA’s seasonally adjusted index of mortgage application activity fell 11.5%. The reason behind the sharp decline was a sudden and sharp rise in mortgage rates. Mortgage rates, which fell to record low levels last year thanks to Fed’s QE3, have risen above 4% for the first time in a year amid talks that the Fed might start winding up its bond buying program as the economic environment continues to improve. For the week ended May 31, rates on fixed 30-year mortgages rose 17 basis points to 4.07%, according to data from MBA. In the last four weeks, mortgage rates have climbed 48 basis points.

Such sudden spike in rates is likely to hurt lending activity. Therefore any gains that banks make on improvement in net interest margin will be offset by a slowdown in lending activity.

Cautious on Regional Banks

Regional banks have had an excellent run in 2013 so far, with most of them outperforming the S&P 500. Year-to-date, PNC has gained over 19.50%, U.S. Bancorp (NYSE:USB) is up more than 9%, and Huntington has gained more than 17.50%. However, the strong performance may not continue given the dilemma regional banks face. I would recommend remaining on the sidelines.

Varun Chandan Arora, MBA has no position in any stocks mentioned. The Motley Fool owns shares of Huntington Bancshares Incorporated (NASDAQ:HBAN) and PNC Financial Services (NYSE:PNC).

The article The Dilemma for Regional Banks originally appeared on Fool.com.

Varun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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