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New Year Brings Cheers for Bank Investors as Stocks Rise: 3 Picks

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2022 has begun on a positive note for the bank stocks. Both the Dow Jones Industrial Average and the S&P 500 closed on new highs on the first day of trading, with the spotlight firmly on banking stocks.

Continuing with the stellar performance of 2021, the KBW Nasdaq Bank Index and the S&P Banks Select Industry Index rallied 2.6% and 2.1%, respectively, during yesterday’s trading session. This seems to be the opportune time to capitalize on the banking industry’s consistently strong performance. So, today, we bring — Northern Trust Corporation (NTRS - Free Report) , East West Bancorp (EWBC - Free Report) and Webster Financial Corporation (WBS - Free Report) — for you to add to your investment portfolio.

Before we discuss these three stocks’ fundamentals and prospects, let’s first understand why investors are bullish on the banking industry and what happened yesterday that led to a further optimistic stance.

Hawkish Federal Reserve

In the December 2021 FOMC meeting, the central bank outlined plans to fast-track the speed to taper its bond purchases. Thus, this will wind up the quantitative easing program a few months earlier than expected.

Owing to inflation at nearly a four-decade high and the unemployment rate reaching the pre-pandemic levels, the Fed continues to take a more hawkish stance. Per the Fed’s statement in the meeting, “In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities”.

With this, the central bank has doubled the taper moves announced in November. A faster end to the bond-buying efforts will position the Fed to hike the interest rates sooner than expected this year (possibly thrice). All 18 Fed officials pointed out in their so-called “dot-plot” that there might be at least one rate hike before 2022 end.

Strong Economic Projections

During the meeting, the central bank raised its economic growth projections. Per the Fed’s latest Summary of Economic Projections, the U.S. economy is expected to grow at a 4% rate for 2022, up from the previously anticipated 3.8%. The pace of growth is then likely to slow down over the next two years, with 2.2% growth for 2023 and 2% for 2024.

Based on the updated economic projections, the central bank now anticipates inflation to be 2.6% this year, above its target of 2% and higher than the previously stated 2.2%. The unemployment rate in 2022 is predicted to be 3.5%, down from the prior mentioned 3.8%.

Rising Treasury Yields

For the major part of 2021, Treasury yields on longer-term bonds rose. The yield on the 10-year U.S. Treasury Bond was 1.51% at 2021-end, up 59 basis points from 0.92% at the end of 2020.

Continuing the same pace, on Monday, Treasury yields jumped to the six-week high for 30-year, 20-year, 10-year and 5-year notes. The improved confidence that the Omicron variant might be less harmful to the global economy than previously thought led the traders to bet that there won’t be any shift to the central bank’s policy in the upcoming months.

Here’s How These Developments are Setting the Stage for Banks

Owing to the Fed’s accommodative monetary policy stance and near-zero interest rates since March 2020, banks have been witnessing pressure on the net interest margin (NIM). Hence, the faster-than-expected interest rate hikes will come as a breather for banks and will improve margins and net interest income (NII), which accounts for a major portion of the revenues.

Further, the steepening of the yield curve (the difference between short and long-term interest rates), robust economic growth and a gradual rise in loan demand are set to drive margins and NII. Banks are taking initiatives to restructure operations to diversify their footprint and revenue base. Efforts to focus more on non-interest income are likely to bolster banks’ top-line growth.

Banks are also 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.

At present, the Zacks Finance sector, of which banks constitute a major part, is ranked #1 out of all 16 sectors. Investing in the top sectors and industries offers a tailwind to your investment portfolio.

Our Picks

On the back of these developments, investing in bank stocks will help generate solid returns. Short-listed banks have an earnings growth rate of 5% or more over the next 12 months, and a market cap of not less than $5 billion. Further, shares of these banks rallied in yesterday’s session as well.

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.

Northern Trust, based in Chicago, provides services from sovereign wealth funds to the wealthiest families across the globe. NTRS is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals.

Organic growth is Northern Trust’s key strength. Revenues witnessed a CAGR of 5.3% over the last five years (2016-2020) on rising non-interest as well as NII, with some annual volatility. The trend continued in the first nine months of 2021.

NTRS' innovative technology-driven hedge fund administration capabilities brought to the marketplace via Northern Trust Hedge Fund Services provide an attractive proposition to the clients. The company is eyeing opportunities to expand its private capital space. The implementation of the Target2-Securities (T2S) strategy to provide better services to its clients is commendable.

For supporting the new investment activities, management is taking steps to tackle expense growth and reinstate operating leverage over the upcoming quarters. Northern Trust, which has a market cap of $25.1 billion, continues to pursue meaningful additional efforts to improve productivity and deliver financial benefits beyond original targets.

Northern Trust has a solid balance sheet. It maintains investment-grade senior debt ratings of A+/A2/A+ and a stable outlook from Fitch, Moody’s and S&P Global, respectively.

Northern Trust’s earnings are expected to jump 13.9% over the next 12 months. In yesterday’s trading, the stock rallied almost 1%.

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 Global and Fitch Ratings render EWBC favorable access to the debt markets.

East West Bancorp’s capital deployment activities seem impressive. In January 2021, the company hiked its quarterly dividend by 20% to 33 cents per share. EWBC 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 a market cap of $11.3 billion, gained 1.4% yesterday. EWBC’s earnings are projected to rise 6.4% over the next 12 months.

Waterbury, CT-based Webster Financial provides business and consumer banking, mortgage lending, financial planning, trust and investment services through its 130 banking centers and 254 ATMs, primarily in southern New England and Westchester County, NY. WBS has a market cap of $5.2 billion.

WBS has an impressive revenue growth story. NII and non-interest income witnessed a CAGR of 5.5% and 2%, respectively, over the last five years (2016-2020) with some annual volatility. The company’s pending merger deal with Sterling Bancorp (likely to conclude on or around Feb 1, 2022) is expected to further aid top-line growth and be accretive to earnings and lead to cost savings.

Webster Financial continues to make progress with its plan launched in fourth-quarter 2020 to drive incremental revenues and cost savings. Consolidation of banking centers and corporate facilities, process automation, ancillary spend reduction and other organizational actions will aid in reducing its operating expenses.

Solid deposit and loan balances, which support Webster Financial’s strong capital position, are poised to grow further on the back of an improving economic backdrop. Per management, the loan pipeline (across all business lines) remains robust.

Revenue growth, along with strong balance sheet and business restructuring initiatives, will keep supporting Webster Financial and improve operating efficiency. The stock rose 3.4% yesterday. WBS’s earnings are projected to increase 9.5% over the next 12 months.

In-Depth Zacks Research for the Tickers Above

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Northern Trust Corporation (NTRS) - free report >>

Webster Financial Corporation (WBS) - free report >>

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