The world has never seen such low interest rates being offered on savings accounts, bonds and loans. These low rates have had strong inflationary effects on all types of asset prices.
But we seem to have reached the bottom, the Reserve Bank of Australia isn't likely to reduce its rate any lower and now the Federal Reserve has increased interest rates in the USA.
Markets and banks have been reacting to the changing winds with rising rates on loans and bonds. This sounds bad news for most stocks, at least temporarily, but here are three stocks that might benefit from rising interest rates:
Commonwealth Bank of Australia (ASX: CBA)
Commonwealth Bank is Australia's largest bank with a market capitalisation of $138 billion.
It has been a steadfast performer for shareholders over the last five years, giving a total shareholder return of 83%. Its managed to maintain profits and dividends, whilst other banks such as Australia and New Zealand Banking Group (ASX: ANZ) haven't.
Commonwealth Bank will benefit from rising interest rates because it earns profit on the difference between the interest it earns and the interest it pays, this is called the net interest margin (NIM).
Higher rates will likely mean Commonwealth Bank can pass on those costs to loan holders and receive a higher NIM. Just this week CBA increased its standard variable investor home loan rate by seven basis points to 5.56%.
Higher interest rates could result in an increase to Commonwealth Bank's share price and profits.
It's trading at 14.6x FY17's estimated earnings with a grossed up dividend yield of 7.39%.
Bendigo and Adelaide Bank Ltd (ASX: BEN)
Bendigo Bank is one of Australia's largest regional banks with a market capitalisation of $5.7 billion.
It has also seen a contraction of its NIM as interest rates become lower. Even so, its cash earnings per share in FY16 were 0.5% higher than FY15 and it increased its dividend per share by 3%.
Regional banks such as Bendigo Bank have a better chance of competing with the big four banks because big banks now have to hold more capital for the same loan, decreasing the leverage they are able to offer.
Bendigo Bank recently raised its variable interest rates by 0.1% for both owner occupiers and investors, which could help its bottom line.
Bendigo Bank is trading at 13.5x FY17's estimated earnings with a grossed up dividend yield of 7.93%.
MFF Capital Investments Ltd (ASX: MFF)
This is a listed investment company (LIC) run by Magellan Financial Group Ltd (ASX: MFG) which focuses on overseas investments.
The reason why I'm mentioning this LIC is because it currently has a large percentage of its portfolio invested in overseas banks such as the Bank of America, Wells Fargo, US Bancorp, JP Morgan Chase, Lloyds Banking Group and the Bank of New York Mellon.
At 30 November 2016 these investments made up 35.4% of the portfolio, so if banks go up, then MFF Capital Investments will benefit greatly.
Time to buy?
The share market could be in for a bumpy ride as more decisions on interests rates are made. The banks may well benefit from higher interest rates, but it would take a while for this to flow through to profit results.
Of the three I've mentioned above, I would pick MFF Capital Investments because I think the overseas banks will face fewer headwinds than the Australian banks over the next two to three years.
