By David Randall

NEW YORK, (Reuters) – Expectations for rising interest rates have boosted the shares of regional bank stocks as a fall in tech stocks drives investors to look for assets that can thrive amid tighter Federal Reserve policy and higher yields.

The SPDR S&P Regional Banking (NYSE:) ETF was up 2% year-to-date on Friday afternoon, compared to a 6.6% decline for the . Individual bank stock gains have been more noticeable: Citizens Financial (NYSE) Group Inc shares were up 8.4%, while KeyCorp (NYSE) shares are up almost 9%.

As investors are increasingly expecting the Fed to raise interest rates aggressively in order to manage inflation, regional banks have a substantial share of their revenue from net interest margins. It is anticipated that the Fed will raise interest rates by March when it meets next week. [L4N2TZ0GW][L4N2TQ2J1]

Treasury yields are rising in anticipation of tighter government. They have increased 40 basis points on benchmark 10-year Treasury, up from their recent lows.

At the same time, some investors expect the expanding U.S. economy and reduced fiscal stimulus to boost loan growth, helping regional banks post full-year 2021 earnings growth of 70.1%, the seventh-fastest among the 126 subsectors in the S&P 500, according to Goldman Sachs (NYSE:).

Moustapha Mounah assistant portfolio manager, James Investment who increased his stake in SVB Financial Group, said, “If you want the yield curve steepening to your advantage, regional banks are the best place to do it.”

Although investors believe that all regional banks will be able to take advantage of rate increases, it is important to understand the Fed’s pace in tightening monetary policy. Mounah stated that a too steep trajectory for rate rises could hurt economic growth, eventually weighing on earnings of banks, but this isn’t his forecast.

Fed funds futures traders fully price in a 25 basis-point hike in March in addition to three rate increases in the year.

In addition to next week’s Fed meeting which concludes on Wednesday, investors await earnings from Zions Bancorp, which is expected to release its latest quarterly results Monday, followed by First Bancorp (NASDAQ:) Tuesday, United Bankshares (NASDAQ) Inc. and Merchants Bancorp (NASDAQ) Wednesday.

Gary Tenner, an analyst with D.A., stated that the Federal Reserve’s pace for rate increases will have a direct impact on revenues within the sector. Davidson & Co. Tenner recently added two more expected rate hikes of 25 basis points to his valuation models for regional banks, bringing his total to four through the end of 2023, he said.

He stated that higher interest rates could have a greater impact on regional bank estimates and return than universal banks. These banks also receive income from investment banking. Banks in the S&P 500 are up 0.4% so far in 2022.

Regional bank shares may be affected by a rapid pace of rate increases. This is in addition to the fact that it could accelerate further the stock selloff which has already driven the Nasdaq into correction territory. It raises expectations that the Fed would increase rates slowly to prevent destabilizing the markets. [L1N2TZ2JG]

The share price is still debating how high and fast the Fed will raise rates. Steve Comery from GAMCO Investors, a research analyst said that if the Fed reverses course the rally may be slowed. [L1N2TZ2JG]

Brady Gailey, managing director at Keefe, Bruyette & Woods, believes even two or three rate hikes would be enough for the sector to post above-market earnings growth as loan growth accelerates. In September, he upgraded the sector of regional banks to overweight.

He said, “They will be big beneficiaries of higher rates but there are also other fundamentals in the sector that are going for it.”