Yields Are Up, and These Banks Will Benefit the Most

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: UMB Financial is headquartered in Missouri, this article has been corrected.
 
The rise in interest rates and corresponding drop in bond prices will affect the securities portfolios owned by American banks. There are both positives and negatives to consider with this. On the positive side, the rise in rates will allow banks to invest their excess cash in securities with higher yields.
 
As a matter of fact, a number of bank management teams have indicated that they are keeping excess liquidity in low-yielding cash and equivalents. I believe that the increase in rates since the start of May has been significant enough to make most banking institutions start investing some of their excess liquidity in securities with longer maturities, benefiting their net interest margins. Here I shall review the three American banks with the highest cash to total asset ratios since they are the ones that should benefit the most.

The cash king

UMB Financial Corporation (NASDAQ: UMBF) has a cash to total asset ratio of 57%, the highest in the US financial industry. Headquartered in Missouri and with banking centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona, UMB is a small bank with a lot to gain from higher interest rates. The bank  is poised to increase its return-on-assets from its current 0.79% to well over 1% as rates continue their upward trend.

UMB, which is up by 36% year-to-date, trades at 190% its book value and 19 times its price-to-earnings ratio. Even if the bank looks a bit expensive relative to bigger banks such as Citigroup (which trades at 80% of its book value), it is really not that expensive when we take into account UMB's high 8.7% return on equity and its huge potential give the size of its cash pile.

Growing at Silicon Valley rates

SVB Financial Group (NASDAQ: SIVB) is the second bank on my cash to total assets ratio list. The bank has 55% of its total assets invested into short term cash equivalent securities. Serving the California area, this small financial institution has been the performance king. The bank has been adding deposits at a 15.5% year-over-year rate and increasing loans at a 24.2% year-over-year rate. As a result, net interest income is growing at a yoy rate of 8.1%.

Even when Mr. Market has recognized the bank's growth (the stock is up by 61% year-to-date), I think there is still more space for continued out-performance. SVB trades at 23 times its price-to-earnings ratio and 152% its book value, but the current interest rate trends are going to contribute immensely to ameliorate the bank's 7% return on equity and 0.82% return on assets.

High quality acquisitions mounting

Prosperity Bancshares (NYSE: PB), with 54% of its assets invested into cash equivalent securities, is the third bank in my list. The bank has been one of the most acquisitive banks in the country and, with the recently-announced acquisition of First Victoria National Bank, it remains on the right track for continued growth. Through the First Victoria acquisition for $374 million in stock and cash, Prosperity has cemented its philosophy of acquiring high-quality assets.The deal will add 30 new branches in Texas and $540 million of trust assets, leaving the combined entity with 250 branches in Texas and $13 billion of deposits.

Texas’s business-friendly environment and favorable demographics will help the bank going forward as much as the current interest rate trends. Prosperity's 9.13% return on equity and 1.34% return on assets makes it a good bet even when the bank trades at 16.5 times its price to earnings ratio and 154% price to book value.

Foolish conclusion

Interest rates are going up, and all the industries that benefit from such a trend will be profitable. The three banks profiled above are the financial institutions that should benefit the most from rising interest rates. Their strong fundamentals and huge cash piles are going to be the key of their operational outperformance. Go long!

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Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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