Analyst notes

The Federal Reserve's 75-basis-point rate hike will bring near-term benefits to U.S. banks, but the long-term impact remains uncertain, according to D.A. Davidson analysts.

In the near term, banks will benefit from asset sensitivity and loan growth. However, headwinds in the second quarter from accumulated other comprehensive income could act as offsets, the analysts wrote. They added that the possibly accelerated deposit repricing and higher provision levels could also offset near-term benefits.

Though the near-term outlook for top-line revenue and EPS growth remains "favorable" for the bank group, higher rates will likely start reducing activity and transaction levels, particularly in commercial real estate segments, the D.A. Davidson analysts noted. A broad economic slowdown could also result in a further decline in asset generation, they said.

The updated dot plot suggesting 200 basis points of additional rate hikes over the next six months points to a positive rate benefit in the second half of the year, which might lead to near-term positive estimate revisions for banks, the analysts mentioned. Meanwhile, 2023 estimates will likely be "less positively influenced," with rate-based upward moves in net interest income levels being moderated by lower volume-reliant benefits, they added.

The pop in bank stocks over the past two days is possibly motivated by the near-term EPS benefit and the Fed's "more resolute" approach to fighting inflation, according to the analysts.

Separately, Raymond James analysts said the 75-basis-point hike will be positive to almost all bank EPS, but more so for banks with larger commercial and industrial loan concentrations. Some asset-sensitive banks will also see a "significantly positive" increase in net interest income and net interest margins in the second quarter, they added.

Banks will be able to keep deposit rates low in the near term due to the higher level of liquidity, though the rapid rate increases may pressure banks to raise deposit rates soon, the Raymond James analysts mentioned.