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Fed Sees 2023 Rate Hike, Solid Economic Growth: 5 Bank Picks

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Unsurprisingly, the Federal Reserve has kept the federal funds rate unchanged at 0-0.25%, while continuing the $120-billion asset purchase program. The central bank carried out these actions last year amid the coronavirus pandemic.

What came as a surprise to investors was the Fed’s signaling of sooner-than-expected interest rate hike. The Fed officials pointed out in their so-called “dot-plot” that there might be two rate hikes by 2023-end. This is a big change from the Fed’s March dot-plot projection of no change in rates through that time frame.

Nonetheless, the Fed chairman Jerome Powell toned down these forecasts as nothing but mere speculations. In the press conference following the end of the two-day meeting, Powell said, “The dots are not a great forecaster of future rate moves and it’s just because it’s so highly uncertain.” He further added that dot-plot must be considered as “big grain of salt”, thereby reminding everyone that the central bank’s policy is based on outcomes and not outlook.

We believe optimism surrounding faster-than-expected economic recovery seems to have prompted faster interest rate hike signal. Per the Fed’s latest Summary of Economic Projections, the U.S. economy will grow at rate of 7% for 2021, up from the previous expectation of 6.5%. The pace of improvement is then anticipated to cool down a bit over the next two years, with 3.3% growth forecast for 2022 and 2.4% for 2023.

Based on the updated economic projections, the Fed now expects inflation to be 3.4% this year, above its target of 2% and significantly higher than prior projection of 2.4%. However, Powell played down concerns related to inflation and termed it as “transitory.” He stated, “Our expectation is that these high inflation readings that we’re seeing now will start to abate.”

Additionally, the central bank took the first steps toward cutting back its asset purchase program by kicking-off “discussion” over tapering the same. “Our intention for this process is that it will be orderly, methodical and transparent,” Powell said.

Here’s How Banks Stand to Gain From These Developments

We know that banks thrive in rising rate environment. So, when the Fed cut short-term interest rates to near zero last year amid the pandemic, banks faced a tough operating backdrop. This, along with economic slowdown and faltering loan demand, substantially hurt banks’ profitability.

Though the change in interest rates is not expected to be in the near term, the Fed hinting at rate hikes by 2023-end is going to support banks’ financials over time. Further, steepening of the yield curve and a gradual rise in demand for loan are expected to aid net interest income as well as margin growth.

Another driving factor for banks’ financials is the overall health of the nation. While the U.S. economy contracted 3.5% last year, it is likely to witness robust economic growth in 2021. Also, as the central bank has come out with more favorable economic growth projections, bank stocks are likely to gain further.

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 Buy Now

One must not miss out on these favorable developments in the banking sector by sitting on the side lines. With the help of the Zacks Stock Screener, we have shortlisted five bank stocks that have an earnings growth projection of more than 25% for 2021. These stocks carry a Zacks Rank # 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, these banks have a market capitalization of $10 billion or more. Further, these five banks have witnessed price appreciation of 40% or more so far this year.

Year-to-Date Price Performance

Zacks Investment ResearchImage Source: Zacks Investment Research

Here are the five picks:

First Horizon Corporation (FHN - Free Report) — based in Memphis, TN — has a market cap of $10.1 billion. It provides commercial and retail banking services. Further, the stock has an earnings growth projection of 46% for 2021. The company’s shares have rallied 42.9% 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. Earnings of the bank, which has a market cap of $10.2 billion, are projected to surge 41.4% this year. The company’s shares have jumped 42.2% in the year-to-date period.

With a market cap of $13.8 billion, Signature Bank (SBNY - Free Report) is a diverse financial services company. This New York-based bank’s shares have soared 91% so far this year and earnings for the current year are projected to grow 31.1%.

Headquartered in Santa Clara, CA, SVB Financial Group (SIVB - Free Report) has a market cap of $30.8 billion. It provides a wide range of banking and financial products as well as services. Its earnings are projected to grow 26% in 2021. The company’s shares have gained 46.2% so far this year.

Western Alliance Bancorporation (WAL - Free Report) — based in Phoenix, AZ — has a market cap of $10.1 billion. It offers various banking products and related services primarily in Arizona, California as well as Nevada. In the year-to-date period, shares of the bank have appreciated 62.4%. Its earnings are projected to jump 62.1% for the current year.

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