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Trader: buy these two bank stocks as the Fed hikes rates

Key Points

On Wednesday Virtus Investment Partners' Joe Terranova bought Regions Financial and added to his Bank of America position because he thinks the bank stocks will benefit from a rising rate environment.

"I think that financials have done well. The problem is they have not given you the type of performance that maybe some of the higher growth technology names have, but if you look longer term, financials have recovered," he argued on Wednesday's Halftime Report. "They have paused and then they have consolidated and refreshed."

Trader: bought Regions Financial ahead of Fed Decision

Terranova is also looking ahead to the results from the Comprehensive Capital Analysis and Review (CCAR) -- released on June 30 -- as a potential upside catalyst for the bank stocks.

Specifically, he's watching what the Federal Reserve says about dividend restrictions.

"The dividend payout ratio needs to be closer to 30%. I think you're going to see that with Regions Financial. I think you're going to see that with Bank of America," he noted.

The financial sector (XLF) has underperformed recently, falling nearly five percent in the past three months. But like Terranova, Morgan Stanley's Lisa Shalett believes the sector will soon turn a corner.

Trading financials as the Fed hikes rates

"I fundamentally believe this is all about the banks being able to demonstrate that they can move those ROE numbers...This is all about the combination of deregulation, higher payouts, and their ability to actually, over the next three to five years, materially cut costs using technologies like blockchain," she argued.

On Wednesday the Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point to 2%.

Joe Terranova owns Regions Financial and Bank of America.