The Federal Reserve’s approach to tackle the red-hot inflation has raised the prospects of a bigger hike in interest rates in March. The consumer price index jumped 7.5% year over year this January. This marked the highest 12-month gain in 40 years.

The rate hike had been in the cards since the December 2021 FOMC meeting when the Fed officials signaled plans to accelerate the speed to pare its bond purchases. This positioned the central bank to raise the ultra-low interest rates sooner than expected. Nonetheless, with the inflation showing no signs of abatement, the Fed is now expected to announce a 50 basis points (bps) hike in rates instead of the usual 25 bps.

Per the CME FedWatch Tool data, at present, there is a 56% chance that the Fed will raise the interest rates by 50 bps in March. Also, market participants are predicting as many as seven rate hikes this year. Thus, thriving in a higher interest rate environment, banks are likely to remain in the spotlight. Hence, we have picked — Signature Bank (SBNY Quick QuoteSBNY - Free Report) , Washington Federal, Inc. (WAFD Quick QuoteWAFD - Free Report) and Eastern Bankshares, Inc. (EBC Quick QuoteEBC - Free Report) — as these will benefit from the Fed’s hawkish stance.

Interestingly, following the release of January inflation data, there has been a rise in market expectations that the Fed will be more aggressive in taming inflation and may even announce an emergency rate hike before March.   

Despite high inflation, the U.S. economy is improving steadily. It expanded 5.7% in 2021, marking the fastest pace of growth since 1984 and a resounding reversal from the contraction of 3.4% in 2020. Further, solid job growth and higher consumer confidence are expected to support economic expansion amid supply chain concerns.

Hence, banks, witnessing shrinking net interest margin and net interest income (NII) since March 2020, are expected to benefit. An improving economy, increase in demand for loans and efforts to diversify operations will also support banks’ financial performance, going forward.

Our Choices

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 earnings growth rate expectation of 10% or more for 2022 and a market cap of not less than $2 billion. Also, these banks currently carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Over the past year, these banks have outperformed both the Zacks Finance sector’s rally of 14.7% and the S&P 500 Index gain of 12.3%.

One-year Price Performance

Image Source: Zacks Investment Research

Signature Bank is a New York-based full-service commercial bank with 37 private client offices located in the New York metropolitan area, Connecticut, California and North Carolina. Founded in 2001, SBNY became a member of the S&P 500 Index on Dec 20, 2021. It has a market cap of $20.4 billion.

Signature Bank has been focusing on cutting-edge technologies to adapt and adopt the expansion of its digital assets business. It was the first FDIC-insured bank to launch a blockchain-based digital payments platform, Signet.

Such dynamic moves by this Zacks Rank #1 company are fueling deposit growth. Deposits witnessed a five-year (2017-2021) CAGR of 33.5%, while net loans recorded a CAGR of 18.7% for the same period. Thus, deposit and loan balances are poised to increase further with support from a gradually improving economy and efforts to diversify lending segments.

Driven by these favorable developments, NII witnessed a compound annual growth rate (CAGR) of 11% over the last five years (ended 2021). The uptrend resulted from the rise in average interest-earning assets, backed by robust average deposit and loan growth. Hence, Signature Bank is well-positioned to maintain its revenue momentum given its client-centric business model and expansion in strategic markets.

Over the past year, SBNY has gained 57.2%. The Zacks Consensus Estimate for 2022 earnings has been revised 10.1% upward over the past 30 days to $19.16. This indicates year-over-year growth of 27.5%.

Headquartered in Seattle, WA, Washington Federal operates as a non-diversified unitary savings and loan holding company. It conducts operations through its federally insured savings and loan association subsidiary, WaFd Bank.

Washington Federal, which currently carries a Zacks Rank of 2, is focused on its organic growth efforts, with revenues witnessing a CAGR of 3.5% over the last six fiscal years (2016-2021). The upswing was largely driven by improving net loan balances, which saw a CAGR of 6.9% over the same time frame. Given the robust loan demand and solid economic growth, the company’s top line is expected to continue improving in the quarters ahead.

WAFD’s balance sheet position remains solid. As of Dec 31, 2021, the company had total debt worth $1.72 billion and cash and cash equivalents worth $1.88 billion. Given the company’s decent earnings strength and liquidity position, Washington Federal is expected to continue meeting debt obligations, even if the economic situation worsens.

Washington Federal’s strong balance sheet position and its trend of returning capital to shareholders are expected to boost investors’ confidence in the stock. The bank has been increasing its quarterly dividend on a regular basis, with the latest one announced in January 2022. Also, as of Dec 31, 2021, it had 3.7 million shares remaining under the buyback authorization.

The stock, with a market cap of $2.3 billion, rallied 19.1% over the past year. WAFD’s earnings estimates for fiscal 2022 have moved 3.2% north over the past 30 days to $2.92. This shows a 22.2% year-over-year increase in earnings.

Eastern Bankshares, based in Boston, MA, provides commercial banking, investment and insurance products and services primarily to retail, commercial and small business customers. EBC operates through more than 120 locations in eastern Massachusetts, southern and coastal New Hampshire and Rhode Island.

As of Dec 31, 2021, this Zacks Rank #2 bank had $23.5 billion in total assets. EBC has been expanding through acquisitions. In November 2021, the company completed the buyout of Century Bancorp, Inc. for $642 million. Also, it has been expanding its insurance business with regular strategic acquisitions since 2002. These efforts are expected to keep supporting the company’s financials.

This apart, EBC has witnessed solid revenue growth. Over the last five years, the same has witnessed a CAGR of 3.8% (ended 2021). Given the synergies from acquisitions and rise in demand for loans, Eastern Bankshares’ top line is expected to continue improving in the quarters ahead.

Further, Eastern Bankshares has impressive capital deployment activities, driven by a solid liquidity position. As of Dec 31, 2021, it had total borrowing of $34.3 million and cash and cash equivalents balance of $1.23 billion. In January 2022, the company hiked its quarterly dividend by 25% to 10 cents per share. As of Dec 31, 2021, almost 8.2 million shares were available under EBC’s buyback authorization, which is set to expire this November end.

The stock, which has a market cap of $3.9 billion, rallied 25.8% in the past 12 months. Over the past month, EBC’s 2022 earnings estimates have been revised 4.5% upward to $1.17. This suggests a 20.6% rise in earnings on a year-over-year basis.