U.S. bank stocks rally on hawkish Fed

NEW YORK (Reuters) - Bank stocks were the standout winners on Wednesday from the Federal Reserve's unexpectedly firm signal that its next rate hike could be just weeks away, a prospect that could boost banks' bottom lines as they charge more for loans.

Bank shares on the S&P 500 rose 3.7 percent on Wednesday, the most since April 13, as investors view higher interest rates as a boost to earnings. The 17 components of the S&P bank index rose between 2.2 and 6.0 percent, with gains of near 5 percent in both Citigroup Inc and Bank of America Corp among the biggest boosts.

"They need other parts of the business to pick up but at the very core it is about interest rates," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Whether the rally proves to be more than a one-day event, though, hinges on the delivery of sufficiently hawkish follow-up commentary from top Fed officials in the days ahead.

On Wednesday, minutes from the Fed's meeting last month showed Fed officials felt the U.S. economy could be ready for an interest rate increase in June.

Markets had earlier priced in one interest rate hike from the Fed late this year, but this week's U.S. inflation data, and recent comments from several Fed policymakers, alongside the minutes, have now all led analysts to see monetary policy tightening soon.

Bill Gross, the portfolio manager at Janus Capital Group Inc, tweeted after the Fed minutes: “So the Fed sort of gets it. Low rates destroy business models and sap economic potential.” Gross has been warning that low short-term interest rates are depressing bank margins.

A more hawkish Fed could whet investor appetite in an industry that has not been favored this year and is down 7.8 percent since Dec. 31, compared with a flat S&P 500.

Confirmation of the hawkish stance could come on Thursday as Fed Vice Chair Stanley Fischer and New York Fed President William Dudley speak in separate events. Fed Chair Janet Yellen's next scheduled public appearance is on May 27.

For now, the Fed’s posture has resulted in a "one-day gift" for financial shares, said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

"Positions were squared, some buyers were drawn in, shorts were covered," Hellwig said. "Now, for it to be sustainable, the consensus has to grow that the Fed is indeed going to raise rates in June and then raise it a second time this year."

Investors could also be attracted by the sale price tag in bank stocks. Valuations on the S&P 500 bank index were last month at their cheapest relative to the overall index in more than 10 years, according to DataStream data.

(Additional reporting by Jennifer Ablan and Lewis Krauskopf in New York; Editing by Matthew Lewis)