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Interest rate losers and winners
Some businesses are particularly at risk, but there are companies that might be worth a look.
March 22, 2005: 4:01 PM EST
By Chris Isidore, CNN/Money senior writer.

NEW YORK (CNN/Money) - There are far more corporate losers than winners in a rising-rate environment but if you look hard enough, there are a few companies that should benefit as interest rates climb.

Some of the problems from rising rates may be balanced if the economy keeps growing solidly, economists said. And some of the companies facing problems have woes that go beyond borrowing costs.

"In general, a rising rate environment slows down growth, so most companies are not going to go as good as when rates are low," said Jay Bryson, global economist for Wachovia Securities.

Several sectors are particularly vulnerable if rates continue to climb, as expected in the months ahead. And there are some niche financial companies that could benefit from higher rates, though it's tougher to pick the winners.

Loser: Automakers

As the warning from GM (Research) revealed last week, automakers have problems with costs, market share declines and rising health care expenses that go beyond the interest rates they pay.

But GM and Ford (Research) will have additional problems as rates rise. Both companies have used low interest financing offers to keep buyers coming to dealer showrooms, and rising rates increase the costs of those incentives. Chrysler Group parent DaimlerChrysler (Research) also has been using financing incentives.

In addition, GM and Ford have seen their finance arms become major profit drivers, as the income from those units balances losses from automaking. Now, with rates spurting up, those incentives are going to be tough to maintain.

"That's going to be a bigger problem going forward," said Dan O'Brien, senior trader at LaSalle Futures Group. "The majority of the income is made on the financing side, not on making cars anymore."

Click here for more on autos.

Loser: Mortgage lenders

For much of last year as the Federal Reserve raised its fed funds rate, mortgage rates stayed low, spurring more home refinancing and borrowing, and strong profits for lenders. That's finally started to change.

The Mortgage Bankers Association found applications fell by a about a third in the week ended March 11 from a year earlier. Mortgage rates are up about three-tenths of a percentage point since early January, according to Freddie Mac, and are likely to keep climbing.

Countrywide Financial (Research), a leading mortgage lender that gets 80 percent of its business from home loans, has seen its stock sink 15 percent in the last two months on concerns about rising rates. Washington Mutual (down $0.66 to $39.76, Research), the nation's largest thrift and another leading home lender, has seen its stock fall 5 percent.

Mortgage lending has also been hurt by factors beyond the interest rate environment.

Financing firms Fannie Mae (Research) and Freddie Mac (Research) have been hit by questions about their accounting practices, leading to management shakeups. And last month Fed Chairman Alan Greenspan urged Congress to impose limits on the two companies' mortgage portfolios to avoid what he called "almost inevitable" problems for the nation's financial system.

Click here for more on mortgages.

Winner: Some banks

Picking banks that will benefit from rising rates can be tricky. If short-term rates rise faster than long-term rates, it can squeeze profit margins for many banks.

That's what happened much of last year as the Fed raised short-term rates while the yield on 10-year Treasury notes stayed pat or even fell. The squeeze on margins could get worse in the current environment.

"Most people expect that the Fed will hike short-term rates more than the 10-year (yield) will go up this year," said Wachovia's Bryson.

Still, there are some banks set to benefit from the rising rates, said Denis LaPlante, analyst with Keefe Bruyette & Woods (KBW), an investment bank concentrating on financial services.

LaPlante said most major banks are diversified enough that the expected changes in rate spreads probably won't significantly change investors' outlook for the institutions.

But banks that have a large source of their funds coming from low-rate deposits, such as checking accounts, or which do a large amount of their business lending to businesses at rates pegged to the prime rate, which mirrors moves by the Fed, are well positioned to gain.

He pointed to two whose business is tightly focused enough to benefit from rising rates -- Silicon Valley Bancshares (Research) and Comerica Inc. (Research)

KBW has an "outperform" rating on Silicon Valley, but only a "neutral" rating on Comerica, partly because of its exposure to the auto industry. But those are the two companies best positioned to benefit purely from rising rates, said LaPlante.

"Silicon Valley certainly has a very cheap funding base that makes a lot more money in rising rate environment," said LaPlante. "Comerica is kind of pure play on commercial lending side."

Winner: Credit card companies

Credit card issuers also may benefit from higher rates, according to KBW, which has an outperform rating on MBNA Corp. (Research) and Capital One Financial Corp. (Research)., the two largest firms to get a majority of their earnings from credit cards.

"The interest rate environment is part of our thesis," said Stephen Schulz, KBW analyst. "We think that rising rates and a slowdown in mortgage markets could be a positive for growth."

Low mortgage rates have cut into credit card revenue as people used refinancing proceeds to pay off card balances. In the past the card companies have seen their cost of funds rise as rates rose.

But Schulz said MBNA and Capital One have diversified their sources of funds since rates were last rising, adding it's unlikely that higher rates will cause significantly higher defaults and loan losses for card companies.

"That credit quality for credit card issuers is more closely tied to employment levels than interest rates," he said.  Top of page


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