Take advantage of rising rates and invest in banks, former Wells Fargo CEO says

  • Former Wells Fargo CEO Dick Kovacevich is selling tech and other stocks in favor of banks, which stand to gain from rising interest rates and a steepening yield curve.
  • Amid fears that more expensive debt from rising borrowing costs could dampen corporate profits and the economy, banks are making gains.
  • Kovacevich attributes previous sluggishness in bank stocks to fear economic growth could slow but says banks are priced to rise moving forward.

Former Wells Fargo CEO and Chairman Dick Kovacevich is selling tech and other stocks in favor of banks, which stand to gain from rising interest rates and a steepening yield curve.

"Banks are one of the few industries that benefit from increased interest rates, especially a steepening of the yield curve," Kovacevich said on CNBC's "Closing Bell." "I just think they're cheap and eventually the market will wake up, particularly if they continue to have reasonably good earnings."

Amid fears that more expensive debt from rising borrowing costs could dampen corporate profits and the economy, banks are making gains. Wall Street's top bank stocks added to strong week-to-date gains, even as the benchmark 10-year yields climbed more than 10 basis points to their highest level since 2011.

J.P. Morgan, Morgan Stanley and Citigroup are all up more than 1 percent since Monday; Bank of America is up 3.2 percent over the same period.

Banks turn a profit by charging borrowers higher, longer-term interest rates compared with the lower, short-term interest rates they dole out to savers.When the yield curve steepens, banks can take advantage of a bigger spread between the rate at which they borrow money and the rate at which they lend.

AB Bernstein's top equity strategist, Noah Weisberger, said thetechnology and financial sectors often outperform in a rising rate environment.

"We would argue that financials — particularly banks — have been held back over the last several months, with scope to catch up to where yields are already," Weisberger wrote.

But bank stocks have been sluggish this year. The KBW Bank Index has remained essentially flat since January, according to FactSet. Kovacevich attributes that sluggishness to fear economic growth could slow.

"I think there's a lot of concern about tariffs; there's concern of Italy and contagion and how long can this very strong economic environment continue? Banks are very dependent upon strong economic growth," Kovacevich said. "I just think there's always something to worry about, and banks seem to be the one people worry about most."

Going forward, Kovacevich says, banks are "priced to go up a lot."

"Banks are cheap relative to the rest of the market. They're off their highs by a long ways, their PE ratio is 25 to 30 percent less than the market — and the market is very elevated. They have good dividends ... between 2 and 3 percent," he said.

As to which banks to invest in, Kovacevich said he owns "a very diversified portfolio of financial institutions" and also owns bank indexes, particularly regional bank indexes.