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3 Bank Stocks for 2022 With Federal Reserve in the Spotlight

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All eyes are on the Federal Reserve, as the two-day FOMC policy meeting is scheduled on Dec 14-15. There have been increasing speculations among market participants that the central bank’s monetary policy stance will likely turn a bit more hawkish.

This, along with subsiding COVID Omicron variant fears, has turned the tide in favor of banks. Today, we are choosing three bank stocks – Bank of America (BAC - Free Report) , East West Bancorp, Inc. (EWBC - Free Report) and Western Alliance Bancorporation (WAL - Free Report) . These banks are fundamentally strong and will benefit from robust economic growth, rising loan demand and higher interest rates.

Effective November, the Fed began tapering its $120-billion bond purchase program, with plans to end the quantitative easing in June 2022. Subsequently, the first interest rate hike since March 2020 wasn’t expected before the second half of next year.

Nonetheless, on Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said, “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.” Powell also got rid of his long-used “inflation is transitory” remark.

Thus, this will allow the central bank to raise rates earlier. Per the CME FedWatch Tool data, at present, there is an 80.8% probability that the Fed will move ahead with a 25 basis points (bps) interest rate hike in June 2022. Further, market participants anticipate two more rate increases of 25 bps each following the June hike.

Banks thrive in the rising rate environment. Thus, banks, witnessing shrinking net interest margin and net interest income (NII) since March 2020, are expected to benefit. Improving economy, increase in demand for loans and efforts to diversify operations will also support banks’ financial performance, going forward.

Our Picks

On the back of these favorable developments, this is the right time to buy bank stocks to generate solid returns in 2022 and beyond.

Short-listed banks have a long-term (three-five years) earnings growth rate of 5% or more, and a market cap of not less than $10 billion. Also, all three banks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

So far this year, these banks have outperformed both Zacks Finance sector’s rally of 21.1% and the S&P 500 Index gain of 26.2%.

Year-to-Date Price Performance
 

Zacks Investment ResearchImage Source: Zacks Investment Research

Bank of America is one of the largest banks in the United States. With total assets worth $3.09 trillion as of Sep 30, 2021, this Charlotte, NC-based bank provides a diverse range of banking and non-banking financial services and products across North America and globally.

BAC is on track to open 500 centers in new cities and redesign existing centers with upgraded technology. These efforts, along with the success of Zelle and Erica, have enabled the company to improve digital offerings and cross-sell products. The acquisition of Axia Technologies will strengthen its healthcare payments business.

The company is also massively benefiting from the global deal-making frenzy. With deal-making and underwriting businesses likely to continue at a robust pace and the investment banking (IB) pipeline remaining strong, BAC is expected to record steady growth in IB fees.

Prudent cost management continues to support BAC’s financials. Over the last several quarters, Bank of America has incurred on an average $14 billion in expenses, despite undertaking strategic growth initiatives.

In July 2021, following the Fed’s approval, Bank of America announced a dividend hike of 17% to 21 cents per share. In October, its share repurchase plan of $25 billion was also renewed.

With a market cap of $361.4 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will aid financials. The stock has gained 46.8% so far this year. BAC’s long-term projected earnings growth rate of 7% promises rewards for shareholders.

Headquartered in Pasadena, CA, East West Bancorp serves as a financial bridge between the United States and China by providing various consumer and commercial banking services to the Asian-American community. EWBC operates through more than 120 locations in the United States and China.

East West Bancorp is focused on its organic growth strategy. Though the company’s NII, which is the primary source of its revenues, declined in 2020, the same witnessed a CAGR of 5.1% over the last four years (2017-2020). The momentum persisted in the first nine months of 2021 as well. Improvement in loans and deposits is expected to further support NII.

East West Bancorp has a solid balance sheet. Also, investment-grade credit ratings of BBB and a stable outlook from both S&P and Fitch Ratings render EWBC favorable access to the debt markets.

East West Bancorp’s capital deployment activities seem impressive. This January, the company hiked its quarterly dividend by 20% to 33 cents per share. EWBC also has a share repurchase plan in place. As of Sep 30, 2021, $354.1 million worth of shares were left to be repurchased under the buyback plan.

Growth in loans and deposits, along with a strong balance sheet position, is likely to keep supporting East West Bancorp’s financials. The stock, with market cap of $11.1 billion, has jumped 54.6% in the year-to-date period. EWBC’s long-term projected earnings growth rate of 10% promises rewards for shareholders.

Western Alliance, based in Phoenix, AZ, provides a wide range of deposit, lending, treasury management, international banking and online banking products and services. As of Sep 30, 2021, WAL had $48.3 billion in total assets, $34.6 billion in net loans held for investments and $45.3 million in total deposits.

Western Alliance has been witnessing a steady improvement in revenues. Over the last five years, the top line recorded a CAGR of 15.3%, with the uptrend continuing in the first three quarters of 2021. Rising loans and deposit balance, efforts to strengthen fee income sources and an improving economy will aid revenues in the upcoming quarters.

The company has been growing through strategic acquisitions too. In April, Western Alliance closed the previously announced buyout of Aris Mortgage Holding Company, LLC for total consideration of nearly $1.22 billion. The acquisition complements the company’s national commercial businesses and expands its mortgage-related offerings. This also diversifies WAL’s revenue mix by expanding sources of non-interest income.

WAL’s capital deployment activities seem impressive. During the third quarter 2021, the company hiked its quarterly dividend by 40% to 35 cents per share. This was the first dividend hike by the company since it started paying the same from August 2019.

The stock, with a market cap of $11.2 billion, has surged 79.4% so far this year. WAL’s long-term projected earnings growth rate of 26.7% promises rewards for shareholders.


In-Depth Zacks Research for the Tickers Above


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Bank of America Corporation (BAC) - free report >>

Western Alliance Bancorporation (WAL) - free report >>

East West Bancorp, Inc. (EWBC) - free report >>