Last month, average APR rates ticked up slightly while delinquency rates dropped. Discover Financial Services (NYSE:DFS) reported a 1.58% delinquency rate for May while Citigroup Inc (NYSE:C) reported 1.98%, both under the typical 3-5% deliquescent rate. Discover trades at an attractive 10 times its earnings with an analyst-estimated 9.8% earnings growth. I believe that we could also see Discover Financial Services (NYSE:DFS) benefit from the expected jump in federal student loan rates.
Legislators have failed to extend the extremely low subsidized rates available to low-income students, and as a result the interest rates on the popular Stafford loans jumped to 6.8%. This increase puts the loans above the low end of Discover Financial Services (NYSE:DFS)’s private loan range. I would expect to see more students look to compare pricing with an industry leader like Discover Financial Services (NYSE:DFS) before accepting their higher APR loans. Increased demand during a time a rising interest rates would bode well for the company’s top and bottom lines.
Citigroup Inc (NYSE:C) trades at 12 times earnings with slightly lower price/earnings to growth ratio of only 1. Analysts are expecting 22% growth this year, followed by 15% growth the year after. As with Well Fargo, Citigroup Inc (NYSE:C)’s net interest margins should be helped by rising interest rates.
While the company has been weighed down over the past few years, its capital structure has improved to acceptable standards under the Tier 1 requirments. I would expect the company to consider upping its lowly dividend payout ratio from near zero. Should interest rates continue higher, expect analysts to reconsider their price targets to the upside.
Wrap-up
While the market may tumble amid rising rates, select companies are positioned well to benefit. Wells Fargo & Co (NYSE:WFC), Discover Financial Services (NYSE:DFS), and Citigroup Inc (NYSE:C) should benefit from rising net interest margins coupled with improving financial conditions. Any broad market weakness is an opportunity to start a position in the financial sector.
The article Banking on Banks Amid Higher Rates originally appeared on Fool.com and is written by Nathaniel Matherson.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc (NYSE:C) and Wells Fargo. Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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