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Yields Climb on Likely Interest Rate Hike: 3 Bank Stock Picks
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Since last week, the 10-year treasury yield have continued to rally. It reached 1.56% yesterday, the highest level since June. This along with the expectation of the Federal Reserve’s likely hawkish stance have sparked the interest of traders in bank stocks, with the KBW Nasdaq Bank Index climbing 6.4% over the past five days. With this, the index has gained 36.3% in the year-to-date period.
Specifically, at the end of two-day FOMC meeting on Sep 22, the Fed signaled that interest rates could increase in 2022, a year earlier than expected, and an official tapering decision to scale back bond-buying might be announced at the November 2021 meeting, if the recovery progress remains on track. This time, it left the policy rate unchanged at near-zero and announced maintaining the pace of asset purchasing at the current level.
Further, going by the Fed’s latest Summary of Economic Projections, the U.S. economy will grow at 5.9% for 2021, down from the previously mentioned 7%. Nonetheless, the projections for 2022 and 2023 have improved to 3.8% and 2.5% from the earlier mentioned 3.3% and 2.4%.
Based on the updated economic projections, the central bank now expects inflation to be 4.2% this year, above its target of 2%, and significantly higher than the previously projected rate of 3.4%. Nonetheless, it said that economic growth has “continued to strengthen” and it expects the unemployment rate to continue to fall through the rest of 2021 and into the next two years.
Thus, after facing a challenging operating backdrop from the onset of the pandemic, U.S. bank stocks are now well-poised to stage a robust recovery, thanks to the central bank’s slightly hawkish stance. This is likely to lift all boats for banks and boost lenders’ profits.
Here’s How Developments are Setting the Stage for Banks
The current low-rate backdrop has been affecting net interest margins for banks, as they hesitate to invest excess cash for the long term, and rather bulk up liquidity in short-term cash and cash equivalents that offer low earnings. With an interest rate hike in the cards, banks are likely to shift their earning-asset mix away from such low-yielding investments, providing some upside to margins and improving investor sentiments for banks.
The Fed hinting at a rate hike in 2022 is going to support banks’ financials over time, as we know that banks prosper in a rising interest rate environment. Further, the steepening of the yield curve and a gradual rise in demand for loans are expected to aid interest income growth, which constitutes a major portion of banks’ revenues as well as margin growth.
Additionally, the Fed’s retraction of its asset purchases indicates the first step toward considering an eventual increase in short-term rates, which brightens the outlook for banks’ net interest margins and profitability.
Lastly, the central bank’s more favorable economic growth projections for 2022 and 2023 are indicative of robust economic growth. The improvement of the overall health of the nation is also likely to strengthen banks’ financials. Given the current backdrop of the likelihood of a higher interest rate environment going forward, numerous banks have been making deliberate efforts to increase their asset sensitivity. This is also likely to fuel growth.
3 Bank Stocks to Buy Now
Considering the discussion above, it might be an opportune time to rack up fundamentally strong bank stocks. While this might be a daunting task, we have shortlisted three bank stocks with the help of the Zacks Stock Screener.
Moreover, these banks have a market capitalization of $5 billion or more, and have witnessed price appreciation of 15% or more so far this year.
Image Source: Zacks Investment Research
JPMorgan Chase & Co. (JPM - Free Report) : One of the biggest global bank, with assets valued at $3.68 trillion, has been making efforts to strengthen its loan portfolio and acquiring the industry's best deposit franchise.The banking giant is also expanding its footprint in new regions by opening branches and is also on acquisition spree to diversify revenues. These will help it to snap up cross-selling opportunities by increasing its presence, and benefit from growth in the card and auto loan sectors amid the continued normalization of the trading business.
Its capital deployment activities also seem impressive, with the recent 11.1% dividend hike and share repurchase authorization of $30 billion for 2021. It has a market cap of around $499 billion. The company’s earnings are projected to jump 58.2% this year.
State Street Corporation (STT - Free Report) : Interest rate and economic growth tailwinds might bolster the bank’s interest income while efforts to strengthen fee income sources are also encouraging.Its global exposure, a broad array of innovative products and services, and business servicing wins and inorganic growth strategy might support fee revenues, thereby, aiding top-line growth. The company is also taking inorganic expansion route to boost top line.
For the third quarter, the company anticipates year-over-year overall fee revenue growth of 7-8%, with servicing and management fee growth of 7-9% each. The net interest income is expected to be $460-$470 million. It has a market cap of $32.4 billion. The company’s earnings are projected to grow 10.8% this year.
Bank OZK (OZK - Free Report) : The company’s business restructuring and branch consolidation initiatives are expected to continue supporting revenue growth.Amid the challenging backdrop in 2020, it exited from Alabama and South Carolina, while closed three branches in Arkansas and one in Florida. With the help of its expansion strategy, Bank OZK has been able to steadily grow deposit and loan balances. With a more favorable operating backdrop, the company is well-poised to continue these trends.
In July 2021, it hiked the dividend for the 44th consecutive quarter. Also, the company announced a share repurchase program to buy back shares worth up to $300 million through Jul 1, 2022. Such impressive capital deployment activities boost shareholder confidence in the stock. It has a market cap of $5.7 billion. The company’s 2021 earnings are projected to surge 86.3%.
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Yields Climb on Likely Interest Rate Hike: 3 Bank Stock Picks
Since last week, the 10-year treasury yield have continued to rally. It reached 1.56% yesterday, the highest level since June. This along with the expectation of the Federal Reserve’s likely hawkish stance have sparked the interest of traders in bank stocks, with the KBW Nasdaq Bank Index climbing 6.4% over the past five days. With this, the index has gained 36.3% in the year-to-date period.
Specifically, at the end of two-day FOMC meeting on Sep 22, the Fed signaled that interest rates could increase in 2022, a year earlier than expected, and an official tapering decision to scale back bond-buying might be announced at the November 2021 meeting, if the recovery progress remains on track. This time, it left the policy rate unchanged at near-zero and announced maintaining the pace of asset purchasing at the current level.
Further, going by the Fed’s latest Summary of Economic Projections, the U.S. economy will grow at 5.9% for 2021, down from the previously mentioned 7%. Nonetheless, the projections for 2022 and 2023 have improved to 3.8% and 2.5% from the earlier mentioned 3.3% and 2.4%.
Based on the updated economic projections, the central bank now expects inflation to be 4.2% this year, above its target of 2%, and significantly higher than the previously projected rate of 3.4%. Nonetheless, it said that economic growth has “continued to strengthen” and it expects the unemployment rate to continue to fall through the rest of 2021 and into the next two years.
Thus, after facing a challenging operating backdrop from the onset of the pandemic, U.S. bank stocks are now well-poised to stage a robust recovery, thanks to the central bank’s slightly hawkish stance. This is likely to lift all boats for banks and boost lenders’ profits.
Here’s How Developments are Setting the Stage for Banks
The current low-rate backdrop has been affecting net interest margins for banks, as they hesitate to invest excess cash for the long term, and rather bulk up liquidity in short-term cash and cash equivalents that offer low earnings. With an interest rate hike in the cards, banks are likely to shift their earning-asset mix away from such low-yielding investments, providing some upside to margins and improving investor sentiments for banks.
The Fed hinting at a rate hike in 2022 is going to support banks’ financials over time, as we know that banks prosper in a rising interest rate environment. Further, the steepening of the yield curve and a gradual rise in demand for loans are expected to aid interest income growth, which constitutes a major portion of banks’ revenues as well as margin growth.
Additionally, the Fed’s retraction of its asset purchases indicates the first step toward considering an eventual increase in short-term rates, which brightens the outlook for banks’ net interest margins and profitability.
Lastly, the central bank’s more favorable economic growth projections for 2022 and 2023 are indicative of robust economic growth. The improvement of the overall health of the nation is also likely to strengthen banks’ financials. Given the current backdrop of the likelihood of a higher interest rate environment going forward, numerous banks have been making deliberate efforts to increase their asset sensitivity. This is also likely to fuel growth.
3 Bank Stocks to Buy Now
Considering the discussion above, it might be an opportune time to rack up fundamentally strong bank stocks. While this might be a daunting task, we have shortlisted three bank stocks with the help of the Zacks Stock Screener.
These companies have an earnings growth projection of more than 10% for 2021. The companies 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 $5 billion or more, and have witnessed price appreciation of 15% or more so far this year.
JPMorgan Chase & Co. (JPM - Free Report) : One of the biggest global bank, with assets valued at $3.68 trillion, has been making efforts to strengthen its loan portfolio and acquiring the industry's best deposit franchise.The banking giant is also expanding its footprint in new regions by opening branches and is also on acquisition spree to diversify revenues. These will help it to snap up cross-selling opportunities by increasing its presence, and benefit from growth in the card and auto loan sectors amid the continued normalization of the trading business.
Its capital deployment activities also seem impressive, with the recent 11.1% dividend hike and share repurchase authorization of $30 billion for 2021. It has a market cap of around $499 billion. The company’s earnings are projected to jump 58.2% this year.
State Street Corporation (STT - Free Report) : Interest rate and economic growth tailwinds might bolster the bank’s interest income while efforts to strengthen fee income sources are also encouraging.Its global exposure, a broad array of innovative products and services, and business servicing wins and inorganic growth strategy might support fee revenues, thereby, aiding top-line growth. The company is also taking inorganic expansion route to boost top line.
For the third quarter, the company anticipates year-over-year overall fee revenue growth of 7-8%, with servicing and management fee growth of 7-9% each. The net interest income is expected to be $460-$470 million. It has a market cap of $32.4 billion. The company’s earnings are projected to grow 10.8% this year.
Bank OZK (OZK - Free Report) : The company’s business restructuring and branch consolidation initiatives are expected to continue supporting revenue growth.Amid the challenging backdrop in 2020, it exited from Alabama and South Carolina, while closed three branches in Arkansas and one in Florida. With the help of its expansion strategy, Bank OZK has been able to steadily grow deposit and loan balances. With a more favorable operating backdrop, the company is well-poised to continue these trends.
In July 2021, it hiked the dividend for the 44th consecutive quarter. Also, the company announced a share repurchase program to buy back shares worth up to $300 million through Jul 1, 2022. Such impressive capital deployment activities boost shareholder confidence in the stock. It has a market cap of $5.7 billion. The company’s 2021 earnings are projected to surge 86.3%.