Despite the lingering concerns related to the impact of the coronavirus pandemic, the performance of banks in the United States has remained impressive so far this year. Year to date, the KBW Nasdaq Bank Index has gained 34.7%, while the S&P Banks Select Industry Index has rallied 28.7%. Over the same period, the S&P 500 Index has gained 24.8%.

While near-zero interest rates (the Federal Reserve had reduced benchmark rates to near zero in March 2020) continued to weigh on net interest margins (one of the key metrics for gauging banks’ profitability) in 2021, banks’ top line got some support from the gradual rise in loan demand and a steeper yield curve. Bank stocks’ financials also received solid support from fee income sources as well as reserve releases. Further, at the recent two-day FOMC policy meeting, the Fed signaled that its decision to speed up the pace of winding down the bond-buying program positions it to raise interest rates (probably thrice) in 2022 if higher inflation continues to prevail.

Driven by these favorable factors, investors are bullish on bank stocks. Thus, banks like Fifth Third Bancorp (FITB Quick QuoteFITB - Free Report) , Wells Fargo & Company (WFC Quick QuoteWFC - Free Report) , Hancock Whitney Corporation (HWC Quick QuoteHWC - Free Report) , Southside Bancshares, Inc. (SBSI Quick QuoteSBSI - Free Report) and Western Alliance Bancorporation (WAL Quick QuoteWAL - Free Report) , which have jumped more than 20% in the year-to-date period, are expected to continue to perform well next year too.

Per the latest Summary of Economic Projections, the Fed estimates real GDP growth of 4% for 2022, better than 3.8% mentioned in September. Also, a PCE inflation rate of 2.6% is projected for the next year.

Since banks thrive in a rising rate environment, an increase in interest rates will likely reduce the pressure on banks’ margin as well as support net interest income growth. Moreover, expectations of an improving economy, continued increase in the demand for loans as well as efforts to diversify operations are likely to keep supporting banks’ financial performance in 2022.

Our Picks for 2022

This seems to be the right time to buy bank stocks to generate solid returns.

The companies that we have short-listed have a market capitalization of more than $1 billion and their share price has increased more than 20% so far this year. Southside Bancshares currently sports a Zacks Rank #1 (Strong Buy), whereas the remaining four banks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the year-to-date price performance of the five banks.

Image Source: Zacks Investment Research

Wells Fargo: The San Francisco-based firm is one of the largest financial services companies in the United States, with more than $1.9 trillion in assets and $1.4 trillion in deposits as of Sep 30, 2021. It has a market cap of $196.3 billion and operates through 4,878 retail bank branches, broad automated telling machines (ATMs) network, the Internet, and other distribution channels across North America and globally.

Wells Fargo’s deposit base witnessed a compound annual growth rate (CAGR) of nearly 2% in the last five years (2016-2020), with the uptrend continuing in the first nine months of 2021. With the gradual revival of the economy, deposit balances are likely to continue improving, particularly in the consumer business and commercial banking segments, thereby, supporting WFC’s liquidity position.

Moreover, Wells Fargo undertakes prudent expense management initiatives, which are expected to keep aiding the bottom line. The company is focused on reducing its expense base by streamlining organizational structure, closing branches and reducing headcount by optimizing operations and other back-office teams.

WFC also has an impressive capital deployment plan. Subsequent to this year’s stress test clearance, it doubled its quarterly dividend to 20 cents per share. Also, the company boosted its share-repurchase authorization to approximately $18 billion for the period between third-quarter 2021 and second-quarter 2022. Through efficient capital deployments, WFC is expected to keep enhancing shareholder value.

Analysts seem to be optimistic regarding the company’s earnings growth potential in 2022. The Zacks Consensus Estimate for WFC’s 2022 earnings has been revised upward by 1.1% over the past 60 days.

Fifth Third Bancorp: With assets of $208 billion as of Sep 30, 2021, Cincinnati-based Fifth Third Bancorp has 1,100 full-service banking centers in 11 states throughout the Midwestern and Southeastern regions of the United States.

Fifth Third Bancorp has a market cap of $29.1 billion and its 2022 earnings estimates have been revised marginally upward over the past 60 days.

FITB’s diverse revenue base is expected to keep supporting its earnings growth. The company has expanded its non-interest income base over the years on strategic investments. Augmented capabilities through strategic partnerships and acquisitions in different industries, such as healthcare (including the acquisition of Coker Capital in 2020 and buyout of Provide in August 2021), will likely support commercial verticals and result in revenue growth, expense savings and operational excellence.

FITB is focused on executing branch optimization measures to enhance its presence in high-growth markets. It is re-allocating its branch network to enhance its presence in the Southeast and reduce presence in the Midwest. Accordingly, it has targeted nearly 25 branch openings per year through financial-year 2025, while the company is on track to close 42 additional branches in first-quarter 2022.

The company’s deposit balances represent an important source of funding and revenue growth opportunity. It continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Fifth Third Bancorp’s total deposits, and loans and leases witnessed a CAGR of 11.3% and 4.3%, respectively, over the last five years (ended 2020).

Hancock Whitney: With a market cap of $4.2 billion, the Gulfport, MS-based company offers banking operations and services, including a variety of transaction and savings deposit products, commercial and small business banking, private banking, trust and investment services, healthcare banking, mortgage banking, and certain insurance services.

HWC remains focused on its revenue growth strategy. Its strategic investments in growth and new markets are expected to bolster the top line and help achieve an efficiency ratio of 55% by the end of fourth-quarter 2022.

Hancock Whitney’s revenues (on a tax-equivalent basis) witnessed a CAGR of 7.9% over the last six years (2015-2020), with the momentum continuing in the first nine months of 2021. Going forward, robust economic growth and a gradual rise in demand for loans will likely support the top line.

The company’s capital deployment activities are also encouraging. Hancock Whitney had 4.1 million shares remaining under the buyback authorization as of Sep 30, 2021, which is set to expire on Dec 31, 2022. Given a decent liquidity position and earnings strength, the company is expected to sustain efficient capital deployments.

The Zacks Consensus Estimate for HWC’s 2022 earnings has increased 2.3% over the past 60 days. Besides, Hancock Whitney’s acquisition of MidSouth Bancorp in 2019 continues to be accretive to its earnings.

Southside Bancshares: Southside Bancshares is headquartered in Tyler, TX, with $7.14 billion in assets as of Sep 30, 2021. The company offers consumer and commercial loans, mortgages, deposit accounts, safe deposit boxes, treasury management, wealth management, trust services, brokerage services, and an array of online and mobile services through its 55 branches.

In the third quarter of 2021, Southside Bancshares’ deposit and loan growth, net of Paycheck Protection Program loans, were 13.5% and 7.9%, on a sequential basis. Macro conditions in SBSI’s markets (Dallas/Fort Worth and Austin areas) remain strong, enabling the company to see a healthy loan pipeline. Going forward, economic growth is expected to aid loan growth.

Since Southside Bancshares traditionally had a liability-sensitive balance sheet, management has taken appropriate steps to reduce the liability sensitivity in anticipation of a rate hike. In the third quarter, SBSI saw an increase in non-maturity deposits and low-cost-interest-bearing liabilities. Also, in the past year, SBSI has increased non-maturity deposits, facilitating a reduction in higher-cost funding avenues like time deposits and FHLB borrowings.

Southside Bancshares’ 2022 earnings estimates have been revised upward by 5.9% over the past 60 days. The company has a market cap of $1.32 billion.

Western Alliance: Based in Phoenix, AZ, Western Alliance 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 (ended 2020), the company’s top line recorded a CAGR of 15.3%, with the uptrend continuing in the first three quarters of 2021. Rising loans and deposit balances, efforts to strengthen fee income sources, and an improving economy will likely aid revenues in the upcoming quarters.

The company also has been growing through strategic acquisitions. In April 2021, Western Alliance closed the previously announced buyout of Aris Mortgage Holding Company, LLC for $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 also seem impressive. In the third quarter of 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 dividends from August 2019.

Western Alliance has a market cap of $10.8 billion and its 2022 earnings estimates have been revised upward by 4.4% over the past 60 days.