There is also a second factor to consider here: the impact of regulation. Two government regulations — the liquidity coverage ratio (LCR) and total loss-absorbing capacity (TLAC) — forced banks to put money at the Federal Reserve, where the rate yield was 25 basis points. They also forced banks to borrow money in the long term debt markets at 5 percent to 6 percent. The government was forcing banks to borrow long and lend short, which kills margins.
Evidence suggests that the majority of regional banks now meet government standards. This means they can take incremental funds and place them into relatively high-yielding loans instead of Federal Reserve deposits. This will help margins.
The point here is that simply looking at the federal-funds rate is not the only way to assess bank margins. There are other factors at play and they are positive not negative. Selling regional banks stocks because the Fed has not raised rates is a very short-sighted game.
Other considerations also favor regional bank earnings in the quarter. Fees are going up. Costs are coming down. Fees are driven by charges on bank accounts and when making new loans. Costs are benefitting from fewer litigation issues and lower personnel expenses.
I love the big bank stocks. I think they are unusually cheap. However, leaving that argument aside for the moment, regional banks are very favorably priced. Their earnings outlook for the third and fourth quarters is positive. At Rafferty Capital Markets, we currently have recommendations on Capital One, First Republic, PNC Financial, SunTrust, and U.S. Bancorp.