Miller Tabak Offers 'Optimistic Case' Scenario for Interest Rates Being Increased 2016

Miller Tabak & Co examined an "optimistic case" with the possibility of interest rates rising through 2016 into 2017 and the impact on regional bank earnings.

Analyst Tom Mitchell noted that "as interest rates rise, banks with low-cost funds, and especially those with large proportions of stable zero interest paying deposits, will begin determining that loans previously unattractive -- due to capital charges and potential loss reserve requirements -- have suddenly become attractive with higher embedded net interest margins, and will begin to grow loan portfolios more aggressively."

Mitchell acknowledged there may not be a huge "pent up" demand, however, greater availability of credit could increase outstanding bank loans by upwards of 25 percent over a two to three year period.

The following banks were upgraded to Buy and were assigned a sample price target based on 12.4x estimated 2016 EPS if rates rise:

Wells Fargo & Co (NYSE: WFC) - $61.25 price target

BB&T Corporation (NYSE: BBT) - $42.32 price target

Huntington Bancshares Incorporated (NASDAQ: HBAN) - $12.08 price target

First Midwest Bancorp Inc (NASDAQ: FMBI) - $19.01 price target

Mitchell cautioned that other outcomes are also possible for 2016 and that "interest rates may fall or stay unchanged going forward." If rates were to remain unchanged, then Mitchell's EPS estimates would "prove to be much too high."