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Fed Ups Rates by 50 Bps, Bigger Hike Off the Table: 3 Bank Picks

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In the biggest move in more than two decades, the Federal Reserve (as expected) raised the short-term interest rates by 50 basis points (bps) to curtail the effects of soaring inflation on the U.S. economy. Now, the interest rates are in the range of 0.75-1.00% — same as almost five years ago.

Despite taking this aggressive step, the central bank ruled out the chance of a larger hike. Fed Chairman Jerome Powell stated that 75 bps hike is “not something that the committee is actively considering” and hinted at the possibility of further hikes of 50 bps in the next couple of meetings. Following these developments, the markets rallied and banks, the biggest winners of the interest rate hike, were among the best-performing stocks.

In line with the broader market's positive sentiments, the KBW Bank Index gained 3.4% and the S&P Regional Banks Select Industry Index was up 2.8%. Today we have shortlisted three banks – Cullen/Frost Bankers, Inc. (CFR - Free Report) , East West Bancorp, Inc. (EWBC - Free Report) and UMB Financial Corporation (UMBF - Free Report) – that have solid prospects and will benefit from rising interest rates. Further, these banks gained more than 1.5% in yesterday’s trading session.

Aggressive Stance: Need of the Hour

The central bank is already behind the curve and the bigger rate hike was a necessity at this moment. The move underscores the severity that the red-hot inflation poses to the country and the economy.

The FOMC statement too noted the same, “The Committee is highly attentive to inflation risks.” The Fed officials are also taking note of the additional geopolitical risks arising from the ongoing Russia-Ukraine war and supply chain disruptions due to the COVID-related lockdowns in China.

The decision to lift the rates by 50 bps was unanimously agreed upon by all the voting members of the committee.

This aside, the Fed announced plans to trim its oversized balance sheet, which has grown to roughly $9 trillion, beginning Jun 1. In this, $30 billion of U.S. Treasuries and $17.5 billion of mortgage-backed securities will be allowed to expire for each of the next three months. Subsequently, each month’s trimming size will double, with plans to reduce the size of the balance sheet to an appropriate level.

In a statement, the central bank, while providing details of the plan, said, “Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.”

3 Bank Winners

Banks thrive in a rising rate environment. Thus, given this favorable development, rise in demand for loans and decent economic growth, banks are likely to witness improvement in net interest margin and net interest income (NII) in the upcoming periods. Also, efforts to diversify operations will boost banks’ financials.

Therefore, this is the right time to buy bank stocks to generate solid returns in 2022 and beyond. The shortlisted banks currently carry a Zacks Rank #1 (Strong Buy) or #2 (Buy) and have a market cap of in excess of $4 billion. These banks are expected to witness earnings growth in excess of 10% for the ongoing year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Year to Date Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

Cullen/Frost Bankers is a financial holding and a bank holding company that provides a broad array of products and services throughout numerous Texas markets. CFR is well-positioned for growth, backed by its robust balance sheet and improving loans and deposit balances despite concerns related to costs.

Cullen/Frost’s organic growth looks impressive. The company’s revenues have witnessed a CAGR of 16.4% in the last four years (2018-2021). It is undertaking efforts to expand in the Texas market.

With developed infrastructure, CFR continues to explore opportunities in the Houston region and has planned a 28-branch expansion in Dallas. The bank plans to triple its size in Dallas by 2024. These strategies are expected to further support top-line growth in the quarters ahead.

This Zacks Rank #1 company’s capital-deployment activities look sustainable. In July 2021, CFR announced a 4% increase in quarterly stock dividend following annual hikes for 27 consecutive years. This January, the company’s board of directors approved a common stock-repurchase program worth $100 million for a one-year period.

The stock, with a market cap of $8.5 billion, rallied 8.4% so far this year. CFR’s earnings estimates for 2022 have been revised 10.5% upward over the past 30 days to $7.50. This implies an 11% year-over-year increase in earnings.

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 5.8% over the last four years (2017-2021). Continued rise in demand for loans and an improving economy are expected to keep supporting NII in the upcoming quarters.

East West Bancorp’s capital deployment activities seem impressive. In January 2022, the company hiked its quarterly dividend by 21%. This followed a 20% hike in both January 2021 and April 2019, 15% in July 2018 and 11.1% in January 2015. EWBC has a share repurchase plan in place. As of Mar 31, 2022, $354.1 million worth of shares were left to be repurchased under the buyback plan.

Growth in loans and deposits, a strong balance sheet position and investment-grade credit ratings are likely to keep supporting East West Bancorp’s financials. This Zacks Rank #2 stock, with a market cap of $10.6 billion, has lost 2.1% so far this year. EWBC’s earnings estimates for 2022 have moved 6.2% upward over the past 30 days to $7.01. This reflects a 14.9% rise from the year-ago recorded number.

UMB Financial provides banking services and asset servicing in the United States. Continued efforts to diversify non-interest income sources and rising loans and deposits are expected to support UMBF’s top-line growth in the quarters ahead.

In an improving lending scenario, UMB Financial’s low-cost deposit base and favorable interest-rate environment are expected to boost its margins. Also, the company’s NII witnessed a CAGR of 10.1% over the last four years (ended 2021).

UMBF has been focused on diversifying operations to non-interest sources of revenues in order to reduce exposure to interest rates to balance the unprecedented risks related to the rate environment. It is optimistic about its fee business, led by commercial cards, on likely growth in corporate spending. Revenues from diverse lines of business and verticals will keep aiding the bank in providing a natural hedge against lower rate environments.

The company, which has a market cap of $4.4 billion, has been raising dividends annually since 2002, with the latest hike of 15.6% announced in July 2021. It has a share repurchase plan in place. In April 2021, the company approved a share-repurchase program of up to 2 million shares. This Zacks Rank #1 company’s capital-deployment activities look sustainable, given the favorable debt/equity ratio and payout rate compared with the broader industry and consistent earnings growth profile.

So far this year, shares of UMBF have lost 12%. The Zacks Consensus Estimate for 2022 earnings has been revised 13% upward over the past 30 days to $8.17. This indicates year-over-year growth of 12.4%.


In-Depth Zacks Research for the Tickers Above


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CullenFrost Bankers, Inc. (CFR) - free report >>

UMB Financial Corporation (UMBF) - free report >>

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