Back to top

Image: Bigstock

5 Bank Stocks to Buy as Fed Signals Faster Rate Hikes

Read MoreHide Full Article

Yesterday, the minutes from the Federal Reserve’s December meeting were released. It showed that the Fed officials are highly concerned about the “elevated levels of inflation” and the tighter job market. The officials are ready to get more aggressive in dialing back the ultra-easy monetary policies, which were introduced in March 2020 to support the U.S. economy from COVID-19 related slowdown.

This will mean a faster-than-previously expected increase in interest rates and a reduction in the balance sheet size “soon after beginning to raise the federal funds rate.” Per the CME FedWatch Tool data, at present, there is almost 70% chance that the Fed will raise the interest rates by 25 basis points in March.

Thriving in a higher interest rate environment, banks are likely to remain in the spotlight. Hence, we have chosen — Comerica Incorporated (CMA - Free Report) , Fifth Third Bancorp (FITB - Free Report) , Wells Fargo & Company (WFC - Free Report) , East West Bancorp, Inc. (EWBC - Free Report) and Western Alliance Bancorporation (WAL - Free Report) — as these will benefit from the Fed’s hawkish stance.

Following the indications that the Fed will be reducing its presence in the long-term bond markets the 10-year Treasury yield rose to its highest level since April 2021. The central bank has approximately $8.8 trillion on its balance sheet. The majority of this was amassed during the pandemic in order to keep financial markets stable and hold down long-term interest rates.

Additionally, prospects of a hike in rates drove yields on the 2-year Treasury note, which are extremely sensitive to Fed policy changes, jumped to its highest level since March 2020.

These factors, along with the Fed’s plan to fast-track the speed of taper its bond purchases, clearly indicate that the U.S. economy is out of the woods from the pandemic era slowdown and is expected to continue expanding this year and beyond despite several concerns like supply-chain bottlenecks and emergence of new COVID-19 variants.

Here’s How Banks Stand to Gain

Since March 2020, banks have been witnessing contraction of the net interest margin (NIM) due to the Fed's accommodative monetary policy and near-zero interest rates. So, the faster-than-expected interest rate hikes will come as a breather for banks and improve margins and net interest income (NII), which constitutes a major portion of the revenues.

Also, 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.

Our Top Five Picks

Based on these favorable developments, investing in bank stocks will be highly profitable, going forward. Short-listed banks have witnessed positive earnings estimate revision of at least 1% for 2022 over the past four weeks. Also, these banks have rallied more than 50% last year.

All five banks have a market cap of not less than $10 billion and currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Performance in 2021

Zacks Investment ResearchImage Source: Zacks Investment Research

Headquartered in Dallas, TX, Comerica delivers banking and financial services in three primary geographic markets — Texas, California, Michigan, Arizona and Florida. The company, which has a market cap of $12.1 billion, has operations in numerous other U.S. states, and Canada and Mexico.

Comerica’s focus on improving operational efficiency led to the introduction of GEAR Up initiatives in mid-2016. Since the implementation of this initiative, the bank has consolidated several banking centers, significantly lowered retirement plan expenses and retrenched a number of employees. These efforts have resulted in an improvement in efficiency ratio and return on equity over time.

Comerica remains focused on revenue growth strategy. With gradually recovering loan commitments, robust loan pipeline and solid economic growth, the company’s loans balance is expected to continue improving, thereby stoking NII growth.

A manageable debt level, investment-grade long-term credit ratings, solid balance sheet position and impressive credit quality are other catalysts supporting Comerica. Additionally, the company’s capital deployment activities are encouraging and sustainable.

In 2021, CMA gained 55.7%. The Zacks Consensus Estimate for 2022 earnings has been revised upward by 6.1% over the past 30 days.

With assets of $208 billion, Cincinnati, HO-based Fifth Third Bancorp has 1,110 full-service banking centers across 11 states throughout the Midwestern and Southeastern regions of the United States.

FITB’s efforts to expand the non-interest income base over the years with the help of 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 support commercial verticals and result in revenue growth, expense savings as well as operational excellence.

The company remains focused on branch optimization to enhance its presence in high-growth markets. Fifth Third Bancorp is re-allocating its branch network to enhance its footprint in the Southeast and lower its presence in the Midwest. In sync with this, nearly 25 branch openings are targeted annually through 2025. It is also on track to close 42 additional branches in the first quarter of 2022 (primarily in the Midwest).

A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting the company’s growth. Also, Fifth Third Bancorp’s sustainable capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.

Shares of FITB, which has a market cap of $31.8 billion, rose 58% in 2021. The company’s earnings estimates for 2022 have moved north by 1.2% over the past four weeks.

San Francisco-based Wells Fargo is one of the largest financial services companies in the United States. WFC had more than $1.9 trillion in assets and $1.4 trillion in deposits as of Sep 30, 2021.

Wells Fargo continues to build on its deposits base, which witnessed a five-year CAGR of (2016-2020) of nearly 2%, with the trend sustaining in the first nine months of 2021. With the solid economic recovery and resumption of business activities, the deposit balance is likely to keep improving. This is likely to support WFC’s liquidity position.

Wells Fargo’s prudent expense management initiatives support its financials. 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.

Normalizing credit quality, healthy balance sheet and investment-grade credit ratings are other tailwinds, which will continue supporting Wells Fargo’s financials. The company’s impressive capital deployment plans are sustainable, driven by earnings strength.

The stock, which has a market cap of $214.7 billion, increased 59% last year. Over the past month, WFC’s 2022 earnings estimates have been revised upward by 4.7%.

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’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 and a strong balance sheet position and investment-grade credit ratings are likely to keep supporting East West Bancorp’s financials. The stock, with a market cap of $11.7 billion, jumped 55.1% in 2021. EWBC’s earnings estimates for 2022 have moved upward by 1% over the past 30 days.

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 drive revenues in the upcoming quarters.

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

WAL’s capital deployment activities seem impressive. During 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 the same from August 2019.

The stock, which has a market cap of $12.1 billion, surged 79.6% last year. WAL’s 2022 earnings estimates have been revised upward by 1.8% over the past month.