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Regional Banks Get a Tailwind from Congress and the Fed

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As the markets digest the results of the summit yesterday between President Trump and Kim Jong Un, the basic reaction seems to be, well…no reaction.  As we await the result of a 2-day meeting of the Federal Reserve this afternoon, the major indexes are all essentially unchanged.

The CBOE Volatility Index (VIX) remains near historical lows at 12%, suggesting investors are expecting little to no market response to the Fed announcement. It is basically considered a foregone conclusion that they will raise short-term interest rates 25 Basis points.

Investors will watch the language in the announcement for clues about a change in the Fed’s inflation target and whether there will be 3 or 4 rate hikes in 2018, though the markets seem comfortable with even the more hawkish Fed stance, as the economy is humming along just fine even as rates normalize from the very low levels of the past decade.

Higher U.S. rates are largely seen as restrictive to U.S. business as they raise borrowing costs and put the brakes on expansion, but one specific business actually benefits, and it’s the same industry that recently got a boost from the relaxation of some of the more onerous aspects of Dodd-Frank legislation – the Banking Sector.

Small and medium sized-banks grnerally benefit the most from rising rates as they tend to have a much bigger portion or their business in traditional deposit and loan business than the bulge-bracket banks – whose businesses are also spread across investment banking, brokerage and trading.

Mid-sized regional banks also got the most relief as the Dodd-Frank threshold for stress-testing to determine systemic risk was raised from banks with $50B in assets to banks with $100M. The threshold will be raised to banks with up to $250B in assets. These banks will no longer qualify as Strategically Important Financial Institutions (SIFIs), and will avoid costly and inconvenient compliance reporting.

Fifth Third Bank (FITB - Free Report) with $142B in assets stands to directly benefit from the reduced regulation and rising rates. Analyst expectations for earnings at Fifth Third have been rising, with 13 upward revisions in the past 60 days. Now expected to earn $2.48/share in 2018, FITB is a Zacks Rank #1 (Strong Buy).

In it’s most recent quarterly report, Fifth Third reported a relatively flat portfolio of loans and leases, but improving credit quality with declining charge-offs and non-performing assets at 0.36% and 0.55% respectively and a comfortable level of Reserve coverage of 1.24%  which equals a Reserve to Non-Performing Loans (RNP) ratio of 252%.

Associated Banc-Corp (ASB - Free Report) is a regional bank holding company with diverse operations primarily in the Midwest. ASB services over a million customer accounts in 8 states and has grown loan volume by an average of 10% over the past four years while keeping Loan to Deposit Ratio under 100%.

An increasing portfolio of loans and deposits and increasing margins have fueled earnings growth at ASB which has posted eight consecutive earnings beats.  The Zacks Consensus Estimate for 2018 now stads at $1.96/share – an increase of 29% over 2017. Associated Banc-Corp is a Zacks Rank #1 (Strong Buy).

In addition to strong organic growth, ASB is poised to benefit from rising rates, a strong dollar and regulation reform and is among the strongest regional banks in the U.S.


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