NEW YORK (CNN/Money) - While the Republicans look likely to keep control of the White House and Congress, there is a big change already in the works for the nation's banks -- interest rates are headed higher.

Next week, the Federal Reserve is expected to raise short-term rates for the fourth time this year, and that trend will mean the end of a prolonged period of easy profits for many banks.

Banks earn their money on the spread between their cost of funds and what they charge borrowers, with much of that tied to the difference between short- and long-term interest rates.

That difference, reflected in the Treasury bond market's so-called "yield curve," has been very steep in recent years, swelling profits at banks across the country, which make much of their money on mortgages and home equity loans.

But as short-term rates rise, the yield curve will flatten, forcing banks to pay more for the money they lend to consumers. That will take a big bite out of bank earnings.

Usually, the difference between a bank CD and a mortgage interest rate is about 2-1/4 percentage points, said analyst Richard Bove at Punk, Ziegel & Co. In the last few years, that's widened to about 4-1/2 points and at times crept above five points, he noted.

"But that cycle is over," Bove said. "The banks are going to get squeezed."

There is a way to play this change in the interest rate environment. Those who track bank stocks say that institutions with big commercial lending, investment banking, and asset management operations should benefit from the shifting cycle.

Jason Goldberg, a bank analyst for Lehman Brothers, said he expects 2005 to log the highest level of commercial and industrial lending since the technology bubble burst in the spring of 2000.

He predicts that banks will see capital market revenue re-accelerating as early as next quarter. "In our view, this scenario favors the large-cap banks relative to their mid-cap brethren," he said.

He prefers Citigroup (Research), which trades at a little over 10 times 2005 projected earnings of $4.35 a share; Bank of New York (Research), with a price-to-earnings multiple of 15.4 on next year's estimated profits, and Wachovia Corp. (Research), trading Wednesday morning at about 11.7 times 2005 estimated earnings of $4.25 a share.

Wachovia is particularly appealing because it has built and bought its way into the brokerage business. It now boasts one of the largest sales forces in the country, on a par with Merrill Lynch, Morgan Stanley and Citigroup, said Bove.

While many banks turn some attention away from lending to consumers and toward asset management -- as well as commercial and investment banking -- bank stocks will get less expensive, allowing investors to scoop up shares relatively cheaply, some analysts said.

And as deposit growth slows, banks will work harder to attract customers, offering longer branch hours and slashing prices on bank products.

The number of banks that already hawk free checking and offer gifts for opening new accounts has skyrocketed, even in the last three months.

"The industry is out there building branches at an extremely active clip -- a new one is slated to open every 2-1/2 hours until the end of 2005," said Bove. "Bank margins will have to come back down to support the increased cost of running all those branches," he added.

Bove recommends Bank of America (Research), which trades at about 11 times projected 2005 earnings of $4.14, because it is diversified enough to compensate for the downturn on the consumer side with its huge commercial and investment banking businesses.

He also likes Cleveland-based KeyCorp (Research), trading at about 13 times next year's projected earnings of $2.59; Milwaukee-based Marshall & Illsley (Research) (14 times estimated 2005 profits), and US Bancorp (Research) of Minneapolis (11.5 times next year's expected earnings).

These three Midwestern stalwarts have large commercial banking operations, which allow investors to bet on an upturn in the industrial cycle.

But steer clear of J.P. Morgan Chase (Research), warned Bove, which recently bought Chicago-based Bank One. It will be undergoing a wrenching restructuring, he said, as CEO-elect Jamie Dimon decides which business lines he wants to keep and which he will jettison.

YOUR E-MAIL ALERTS Follow the news that matters to you. Create your own alert to be notified on topics you're interested in. Or, visit Popular Alerts for suggestions. Manage alerts | What is this?

It's also not the time to invest in small and mid-size banks, Bove and some other bank analysts said.

The multiples on the small institutions are still lofty, thanks to the inflated housing market, and those prices will only come down as the air slowly comes out of residential real estate.

Then those banks are likely to get hit by a consolidation wave as they scurry to shore up declining revenues via a slew of mergers and acquisitions. While those trends can boost the shares of some smaller banks, it's often hard for nonprofessional investors to successfully time those plays.

The election, meanwhile, will also make its impact felt. The winner who fosters stronger economic growth will be better for the banks, said Robert Albertson, principal and chief strategist of Sandler O'Neill.