Who will benefit most from rate increase?

by Justin da Rosa24 Nov 2015
Smaller lenders could be the biggest beneficiary of the expected rate hike, according to industry professionals.

"It appears the Fed is going to raise interest rates in December, and that's particularly good for community banks,” Jack Shubitowski, president and CEO of Huron Valley State Bank, told Crain’s Detroit Business. “We should become more profitable in a rising interest rate environment."

It seems after months of delays, the Fed is preparing to raise its benchmark interest rate in December, and that expectation led to upticks in various banking shares – especially following early November’s optimistic jobs data.

That piece of data was considered key in helping forecasters predict whether or not the central bank plans to raise rates next month.

Traders saw a 70% chance the Fed will make that move following the release of U.S. labor data. That was up from 56% prior to the release.

"It’s definitely a hurdle that’s out of the way,” Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that are obligated to bid U.S. debt sales, told Bloomberg at the time. “The November report doesn’t have to be a blowout to justify an increase in December. It really does check a lot of boxes for the Fed: good wage data, good payrolls."

America added 271,000 jobs in October, following an increase of 137,000 in September.

Small lenders are more reliant on interest earning business than their larger banking counterparts. Generally, larger banks are able to make much more profit through deposit-taking lines of business and are able to take smaller margins of profit on interest earning business, such as mortgages. So smaller lenders are likely looking forward to larger margins that will be made possible by the rate hike.

"Clearly this is going to be a big help, particularly for community banks, who are rate sensitive," J. Grant Smith, president and CEO of Clarkston State Bank, told Detroit Business.

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