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Fed Provides Upbeat Economic Projections: 5 Bank Picks

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As expected, there were no immediate changes in the monetary policy at the end of the two-day FOMC meeting yesterday. The federal funds rate remains at 0-0.25%, which the central bank had cut last year amid the coronavirus pandemic.

Additionally, the Fed officials didn’t make any changes to their guidance on the timeline for rate hike, with majority not expecting an interest rate hike till 2023-end. Nonetheless, three on them project a hike next year, while seven foresee a rise in 2023.

Further, the central bank stated that it will continue with the asset purchase program. At present, it buys roughly $120 billion per month in bonds in order to keep “the flow of credit to households and businesses.”

The Fed Chair Jerome Powell clearly stated that “stance of monetary policy is appropriate” at this time and the central bank is not much concerned about inflation.

Amid all these, the central bank did revise its economic growth projections upward. Per the Fed’s latest Summary of Economic Projections, the U.S. economy will grow at rate of 6.5% for 2021, up from the previous expectation of 4.2%. Notably, these levels have hardly been seen over the past 25 years. The pace of growth is then anticipated cool down over the next two years, with 3.3% growth forecasted for 2022 and 2.2% for 2023.

Based on the updated economic projections, the Fed expects inflation to be 2.4% this year, above its target of 2% and significantly higher than prior projection of 1.8%. The unemployment rate in 2021 is predicted to be 4.5%.

How Banks Stand to Gain From Bullish Economic Outlook?

One of the main driving factors for banks’ financials is the overall health of the nation. Last year, the U.S. economy contracted 3.5% (per the second estimate released last month) due to the pandemic.

Banks had faced a tough operating backdrop. This, along with lower rates and faltering loan demand, substantially hurt banks’ financials. The FDIC-insured commercial banks and savings institutions reported net income of $147.9 billion in 2020, plunging 36.5% year over year. This was largely due to lower net interest income and drastic jump in provision for credit losses.

Bank stocks were out of favor for majority of the last year. Notably, in 2020, the SPDR S&P Regional Banking ETF and the KBW Nasdaq Bank Index were down 8% and 14.6%, respectively.

Nevertheless, the bearish stance is gradually reversing since the announcement of COVID-19 vaccines over the past few months. Giving further impetus to this is the passage of nearly $3 trillion worth of stimulus package by the Congress. Also, falling coronavirus infection rate and rise in vaccination coverage with the President Joe Biden planning to secure sufficient doses by May-end (two months earlier than expected) continue to support the economy.

Now that the central bank has come out with more favorable economic growth projections, bank stocks are likely to gain further. As the economy gradually improves, demand for loans is expected to rise.

Further, banks seek to borrow money at short-term rates and lend at long-term rates. Now that long-term rates are rising (the yield on the 10-year U.S. Treasury was 1.65% yesterday), the yield curve is steepening. Thus, almost all banks – big and small, which faced net interest margin compression last year – are expected to witness some improvement in the same.

Also, as interest income constitutes a major portion of banks’ revenues, steepening of the yield curve, along with rise in demand for loans, will support net interest income.

Moreover, banks are making efforts to streamline operations and expand businesses (organically and inorganically) to diversify footprint and revenue base. Banks’ efforts to focus more on non-interest income are likely to boost top-line growth to some extent.

Banks are undertaking measures to align their businesses for technology driven clients by spending substantially on technology to upgrade and add advanced features. This is expected to lower costs and improve operating efficiency, going forward.

5 Bank Stocks to Bet on

One must not miss out these favorable developments in the banking industry by sitting on the side-lines now. With the help of Zacks Stock Screener we have shortlisted five bank stocks that have an earnings growth projection of more than 15% for 2021. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Also, these banks have the market capitalization of $5 billion or more. Further, these five banks have witnessed price appreciation of 20% or more so far this year.

Year-to-Date Price Performance

 

Here are the five banks:

M&T Bank (MTB - Free Report) , based in Buffalo, NY, has a market cap of $19.7 billion. It provides commercial and retail banking services. The company carries a Zacks Rank #2 at present. Further, the stock has an earnings growth projection of 20.7% for 2021. The company’s shares have rallied 20% so far this year.

Headquartered in Pasadena, CA, East West Bancorp (EWBC - Free Report) serves as a financial bridge between the United States and Greater China by providing various personal as well as commercial banking services. It has a market cap of $10.9 billion and earnings are projected to grow 23.4% this year. The shares of this Zacks Rank #1 company have jumped 53.9% in the year-to-date period.

With a market cap of $7.3 billion and a Zacks Rank #2, Synovus Financial (SNV - Free Report) is a diverse financial services company, which conducts its banking operations through Synovus Bank. The Columbus, GA-based bank’s shares have surged 48.7% so far this year and its current-year earnings are projected to jump 49%.

Headquartered in Waterbury, CT, Webster Financial (WBS - Free Report) has a market cap of $5.5 billion and carries a Zacks Rank #2. It offers business and consumer banking, mortgage, financial planning, trust and investment services. Its earnings are projected to grow 34.7% in 2021. The company’s shares have gained 46.1% so far this year.

Western Alliance Bancorporation (WAL - Free Report) , based in Phoenix, AZ, has a market cap of $9.9 billion. It offers various banking products and related services primarily in Arizona, California, and Nevada. The company presently sports a Zacks Rank of 1. In the year-to-date period, shares of the bank have appreciated 63.5%. Its earnings are projected to rise 45.2% for the current year.

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