For many types of companies, a looming increase in interest rates can spell trouble. But for banks, it can translate to higher profits. That’s one of the reasons that bank stocks are attracting attention now.

When the Federal Reserve starts to raise interest rates—likely later this year—banks will be able to widen the margin between what they charge borrowers for loans and what they pay account holders for deposits. Even before the Fed acts, bank profits jumped 6.9% in the first quarter of 2015, reflecting higher revenues and a 6% drop in delinquent loans. And the balance sheets of ­major banks have improved enough that regulators have given them permission to increase dividends and boost stock buybacks.

The Standard & Poor’s Banks ­Select Industry stock index gained 9% this year through June 15, compared with 2.2% for the Standard & Poor’s 500. And there’s plenty of room for further strong gains. Unlike the overall market, which has been hitting record highs, bank stocks have recovered only half of what they lost during the bear market of 2007–2009.

My favorite bank stocks that are undervalued by at least 25%…

Bank of America (BAC), the ­second-largest US bank, has resolved most troubles related to its mortgage practices, including legal challenges and huge financial penalties since the nation’s financial crisis.

Citigroup (C), the most undervalued of the major banks, has new management that is cutting noncore businesses such as subprime lending, exiting unprofitable operations in countries such as Japan and Costa Rica and concentrating on key markets including Hong Kong. Profits rose by 21% in the first quarter of 2015.

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