U.S. Bancorp (USB), PNC Financial Services (PNC): Are These Banks Well Suited for Rising Interest Rates?

A challenging future ahead

The future for these banks will be even more challenging as commercial and industrial loan growth has deteriorated over the current quarter. The growth figures have gone down from as high as around 14% in the mid of year 2012 to around 9%. At the same time, total lending activity has also seen some downturn. Total loans growth has gone down from 4% at the beginning of the current year to around 2% now.

Among the three banks considered, SunTrust remains my least preferred. Since interest income accounts for around 60% of the bank’s total revenues, SunTrust needs to do the most in order to survive the volatile interest rate environment. SunTrust is heavily exposed to commercial and industrial (C&I) loans, as around 49% of its total loans are C&I. Looking at this, and the lack of positive stock price drivers, UBS AG (USA) (NYSE:UBS) downgraded SunTrust to neutral.

For PNC Financial Services (NYSE:PNC), the near term stock price driver is its $9.5 billion decision on BlackRock, Inc. (NYSE:BLK). The bank has a 21% stake in BlackRock, Inc. (NYSE:BLK), which is a profitable entity. If PNC Financial decides to get rid of its stake in BlackRock, it will lose 13% of its profits. However, a sale of the stake could make significant amounts to cash available to PNC Financial for other more profitable investments. However, the bank is also heavily exposed to C&I lending. Therefore, the sluggish growth in C&I during the current quarter will hurt the bank.

U.S. Bancorp (NYSE:USB) is expected to perform better during the current quarter’s higher interest rate environment. The bank’s CFO has been reported by the Wall Street Journal as saying that  management expects the bank to report higher revenues despite rising interest rates. It is already the third largest home lender in the US, and it expects its mortgage originations to grow further.

Conclusion

While these banks emerged stronger after the crisis, the prevailing volatility in interest rates, which is discouraging C&I loans, will cause SunTrust to report lower earnings at the end of the current quarter. PNC Financial is also heavily exposed to C&I. However, I believe US Bancorp is best positioned to further expand its mortgage banking activity and increase its top line.

Adnan Khan has no position in any stocks mentioned. The Motley Fool owns shares of PNC Financial Services (NYSE:PNC).

The article Are These Banks Well Suited for Rising Interest Rates? originally appeared on Fool.com and is written by Adnan Khan.

Adnan 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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