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Hawkish Remarks From Powell, Others Bode Well for Banks: 3 Picks

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The Federal Reserve is ready to take all necessary steps to fight record-high inflation. Earlier this week, at "Policy Options for Sustainable and Inclusive Growth" 38th Annual Economic Policy Conference National Association for Business Economics, Jerome Powell said, “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

On similar lines, other policymakers are commenting on taking “faster” action to tighten the monetary policy to control the accelerating inflation numbers, which are at a 40-year high now. Some of them are St. Louis Federal Reserve Bank President James Bullard, Richmond Federal Reserve Bank President Tom Barkin, Christopher J. Waller, a member of the Board of Governors of the Federal Reserve System and once dovish Minneapolis Federal Reserve Bank President Neel Kashkari.

In this context, bank stocks are the clear winners as they thrive in a rising rate environment. So, we are discussing three bank stocks – Associated Banc-Corp (ASB - Free Report) , Citizens Financial Group (CFG - Free Report) and Hancock Whitney Corporation (HWC - Free Report) – that will gain from higher interest rates.

Such aggressive comments following the announcement of the first interest rate hike since 2018 show the central bank’s intention of controlling raging prices at any cost. Amid such hawkish remarks, the CME FedWatch Tool is already showing more than 70% probability of a 50 basis points hike in May, way above the 44% chance of a similar hike a week ago.

Though, like others sectors, bank stocks have dipped on broader geopolitical concerns arising out of the ongoing Russia-Ukraine conflict, rising interest rates and business expansion efforts will support their financials. The KBW Bank Index is down 4.7% so far this year, in line with the broader market bearish sentiments.

The Zacks Finance sector (of which banks constitute the major part) is currently trading at a price/tangible book value of 4.51X, significantly below the broader market average of 15.82X. Thus, beaten-down stock prices and cheap valuation make a good entry point for investors.

Our Choices

The shortlisted banks currently carry a Zacks Rank #2 (Buy) and have a Value Score of B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or #2, offer the best investment opportunities for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.

Also, these banks have a market cap of more than $3 billion and have outperformed the broader market so far this year.

Year to Date Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

Associated Banc-Corp: Based in Green Bay, WI, ASB provides a full range of financial products and services through more than 200 banking offices. The company’s organic and inorganic growth efforts are likely to continue enhancing profitability.

Associated Banc-Corp is witnessing a steady improvement in revenues. Though the total revenues declined last year, the company expects expansion of its lending capabilities (as part of its new strategic plan) to help drive incremental revenues. Management anticipates net interest income to be more than $800 million and non-interest income to exceed $300 million this year.

ASB has been undertaking several measures to improve operating efficiency. In September 2021, it announced a new expansion plan, which will bolster operating leverage, and improve lending and digital capabilities. The company expects net total revenues to witness a CAGR of roughly 8% from the end of 2021 through 2023.

Given a solid balance sheet position, Associated Banc-Corp, which has a market cap of $3.5 billion, is well-positioned to grow on the back of strategic buyouts. In 2020, the company acquired First Staunton Bancshares, while in 2019, it took over 32 branches in Wisconsin. These, along with other past deals, are expected to be accretive to its earnings.

So far this year, shares of ASB have rallied 3.4%. Further, the Zacks Consensus Estimate for 2022 earnings has been revised 3.6% upward over the past two months to $1.71.

Citizens Financial: One of the largest retail bank holding companies in the United States, Citizens Financial has nearly 940 branches and 3,000 ATMs in 11 states across the New England, Mid-Atlantic and Midwest regions. It has a market cap of $21.1 billion.

This February, it acquired 80 East Coast branches and the national online deposit business from HSBC Bank, thereby strengthening its balance sheet position. In July 2020, Providence, RI-based CFG inked a deal to acquire Investors Bancorp in a bid to bolster its banking franchise. The acquisitions of ISBC, combined with the HSBC branches, create a strong franchise in the greater New York City and Philadelphia Metro areas and New Jersey by adding 234 branches. Also, the acquisitions are expected to add $29 billion of deposits and $24 billion of loans, creating a strong foundation for top-line growth.

These aside, the company is undertaking strategic buyouts to expand the fee income mix and diversify revenues. These initiatives enable CFG to expand its product capabilities and geographic reach.

Apart from inorganic growth moves, solid loan and deposit balances are likely to aid the company’s financials. CFG’s loans and deposits recorded a CAGR of 3.7% and 11%, respectively, over the last three years (2019-2021). The company has been enhancing its deposit base by advancing its deposit-gathering capabilities and digital-first model focused on national expansion.

The Zacks Consensus Estimate for CFG’s 2022 earnings has been revised 1.4% upward over the past 60 days to $4.46. In the year-to-date period, shares of the company have gained 2.9%.

Hancock Whitney: As a bank and financial holding company, HWC operates through 177 full-service bank branches and 240 ATMs across Mississippi, Alabama, Louisiana, Florida, and Texas. Supported by the continued rise in loan balances and inorganic growth efforts, the company’s bottom line is likely to keep improving.

Hancock Whitney remains focused on its revenue growth strategy. Revenues (on a tax-equivalent basis) witnessed a CAGR of 6.9% over the last six years (ended 2021). Total loans saw a CAGR of 4.8% over the same time frame. Decent economic growth and a gradual rise in demand for loans will support the top line.

The company’s strategic investments in growth and new markets are expected to bolster its top line and help in achieving an efficiency ratio of 55% by fourth-quarter 2022-end. Management projects total core loan growth to be 6-8% this year.

Apart from organic expansion efforts, HWC has undertaken acquisitions in the past, which continue to support its financials. Given the strong balance sheet position, the company is well-poised to further grow through inorganic means to diversify revenues and improve market share.

The Zacks Consensus Estimate for 2022 earnings has been revised almost 1% upward over the past 60 days to $5.29. So far this year, shares of HWC have gained 5.9%. The company has a market cap of $4.5 billion.

See More Zacks Research for These Tickers

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Citizens Financial Group, Inc. (CFG) - free report >>

Associated Banc-Corp (ASB) - free report >>

Hancock Whitney Corporation (HWC) - free report >>

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