The fight against inflation will likely take center stage this week with fresh economic data in the wings. March’s consumer price index and producer price index are slated for release Tuesday and Wednesday, respectively. This morning, concerns over tighter fed policy and its impact on the healing economy weighed heavily on investor sentiment.
The market was anticipating the first 25 basis point rate hike last month. What came as a surprise was the Fed’s more hawkish approach, indicating that it plans to make comparable rate hikes at each of its next six FOMC meetings in 2022. And it’s planning another four hikes next year for a total of 11 hikes in two years.
While bank stocks had factored in rate hike benefits to a certain extent, more rate hikes than projected also means potential for banks to generate higher revenue in 2022. Today we’ll discuss a banking name that’s likely to do well up against a more hawkish Fed, due to its high level of rate sensitivity.
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As one of the perennially most rate-sensitive banks out there, Comerica (CMA) is one to watch as the market adapts to a more hawkish Fed. Until recently, Comerica’s management had only expected four 25 basis point rate hikes this year. According to its annual filing, a 1% increase in the federal funds rate would lead to a whopping 12% increase in net income interest over the next twelve months. Considering the implications, the upside potential is undeniable.
Furthermore, Comerica has high cash levels right now, which will earn a lot more yield as rates go up. With roughly 90% of total loans in various commercial segments, many of its loans also have floating rates that will reprice higher with the federal funds rate. With a forward 12-month P/E of 15, CMA is still attractively priced. Plus, the conservative 33% payout ratio means the 3% dividend yield isn’t going anywhere anytime soon.
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