Before You Sell Your Bank Stocks….

The article discusses how banks must offer higher rates to depositors to stay competitive when interest rates go up. True to form, as expectations of a rate hike have gained momentum, bank stocks have taken a beating, falling nearly 8% from a peak in March, vs. a 5% decline for the market as a whole. This time around, investors may come to regret their time-tested reaction. In recent years, many banks have expanded into businesses that are less sensitive to interest rates. The stronger economy, meanwhile, should lead to both greater loan demand and fewer write-offs for bad loans. Diversification explains a big part of why the impact of higher rates could be less dramatic than before. The 50 largest U.S. banks now get 40% of their earnings from fees generated by the likes of investment banking, asset management, and insurance, up from 26% in 1990, according to Ryan Beck & Co., a bank-stock research firm. At many large financial institutions -- Northern Trust, Bank of New York, First Horizon National (formerly First Tennessee National), PNC Financial Services, and State Street -- such activities account for more than half of total revenues. Changes in interest rates don't have any direct influence on fee-earning businesses. Investment banking and brokerage earnings, for example, are expected to climb as the market for mergers and initial public offerings heats up.