Predicting the direction of interest rates is hard, if not impossible. But sometimes, the market gives you a free option: It gives you the opportunity to buy a great stock that will become even better if rates rise.
These two bank stocks have attracted billions in non-interest deposits and invested heavily in floating-rate loans and securities. Thus, if rates jump, they'll take in more in interest than they pay on their deposits at the margin, adding to earnings.
But if the Federal Reserve leaves investors disappointed with its trajectory on rates, you can still be pleased -- these are great banks with or without a rate increase.
1. Cullen/Frost Bankers (CFR -0.32%)
The sixth-largest bank in Texas, Frost Bank controls just 3% of the state's deposits. But size isn't everything when it comes to profitability. Years of stability in one of the most volatile states for banking has given it pricing power that most banks crave.
In the most recent quarter, Frost reported that 42.6% of its deposits were non-interest bearing. In other words, many of its customers are keeping deposits at the bank, and receiving nothing in return. And even those who are receiving interest on their deposits are getting very little. Its interest expenses on interest-bearing deposits tallied to just 0.06% per year.
Should interest rates rise, Cullen/Frost Bankers should see yields on its assets grow faster than its liabilities, driving profit growth. Helping it here is the fact that 45% of its earning assets are invested in securities, which typically reprice faster than longer-term mortgage loans, for example. As an aside, securities -- think government bonds -- are simply safer than a loan, reducing the bank's credit risk. Being in the thick of the oil patch, Cullen/Frost has an excellent opportunity to roll its low-yielding securities into higher-yielding loans to desperate oil companies, adding another earnings driver.
With or without rate increases, Frost is a fine bank to own. The company has consistently generated a return on assets of 1% in recent history, resulting in a return on tangible equity of 13.6% in the most recent quarter. A rate increase would be the kicker to an already excellent bank.
2. BOK Financial (BOKF -0.81%)
Based in the South Central United States -- read: mostly Oklahoma -- BOK Financial has done well to attract low-cost deposits. Like Frost, roughly 38% of BOK Financial's deposits are non-interest bearing, primarily as a result of its relationships with commercial customers, who also drive the bulk of its lending. As of its latest filings, commercial and industrial loans made up nearly 65% of its total loan book.
BOK Financial's interest-bearing deposits are cheap, too. The company paid an annual rate of roughly 0.36% on its interest-bearing deposits last quarter, driven mostly by a relatively high amount of certificates of deposit. Including its non-interest-bearing deposits, BOK Financial paid about 0.22% across all of its deposit funding.
Should interest rates rise, BOK Financial is in a position to profit, as its loan yields reprice faster than the rates it pays on its funding. The company disclosed in its most-recent quarterly filing that 72% of its loans are variable loans, which pay a rate of interest that will rise and fall with the general level of interest rates.
While BOK Financial would benefit from a rate increase, it doesn't necessarily need one. The company recently earned 1.4% on its assets, generating a return on tangible equity of 14.4%, a remarkable achievement in a low interest rate environment.
