Chairman Jerome Powell's debut Fed meeting starts today and all eyes are on him. At the end of the two-day FOMC meeting tomorrow, another rate hike is anticipated. Per the CME Group FedWatch tool, the odds of a hike this time are as high as 93%.
While the market is almost certain of a rise in rates to 1.50-1.75% this time, Powell’s statement is of more interest for further information on the number of rate hikes this year. Notably, the Fed had hinted at three hikes for 2018 while announcing the rate hike in December 2017. So, it will be interesting to see whether the central bank sticks to its prior outlook or hints at raising the number.
Why the Fed Might Increase the Number of Rate Hikes?
You might be wondering what has changed between December 2017 and now, that paved way for the scope of rise in the number of rate hikes this year.
The two key mandates for rising rates — full employment level and inflation of 2% — have been fulfilled (well, almost). The current unemployment rate of 4.1% is close to the full employment level. Also, inflation data (moving toward the Fed’s target) supports a further rise in rates.
Apart from these, a slew of favorable economic data, including continued strengthening of the labor market, increase in household spending, rise in economic activities and better-than-expected GDP numbers, supports a more hawkish stance.
In fact, the Fed minutes of the January FOMC meeting point toward the same. The report highlighted that improving economic growth, stimulus from the tax cuts and rise in inflation support a more aggressive stance by the Fed in hiking rates.
Banks Thrive in Rising Rate Environment
The banking industry benefits the most from the rising rates. Banks derive benefits from a steep yield curve (wide spread between short and long-terms rates). A rise in short-term rates (to which deposits are tied) helps banks charge more on loans (to which long-term rates are tied), if the long-term rates are higher than the short-term ones. Hence, banks benefit from rising interest rates only if the increase in long-term rates is higher than the short-term ones.
Also, rising rates reflect an improving domestic economy. And an improving economy implies that the credit quality is improving, which is great for banks' profitability as well.
In addition, banks are expected to gain from potential lesser regulations.
These factors have largely led to the rally in the finance sector, benefiting bank stocks the most. Over the past year, the Major Banks and Banks & Thrifts have gained 22.4% and 16.8%, respectively. Both outpaced the 14.1% gain for the Zacks Finance sector.
In case the Fed indicates an increase in number of rate hikes this year, the rally for bank stocks will likely continue. So, if you want to be part of this rally, this is the right time to buy a few bank stocks that have strong fundamentals and growth prospects.
Bank Stocks Worth Betting On Right Now
While all banks will benefit from rising rates, to pick a handful of these for your investment portfolio is quite daunting. To make this difficult task somewhat easy, we have taken the help of the Zacks Stock Screener.
Through it we shortlisted bank stocks with projected 2018 earnings growth of 20% or more and market capitalization greater than $2.5 billion. Also, these stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are the five bank stocks:
Headquartered at Birmingham, AL, Regions Financial Corporation (RF - Free Report) has a Zacks Rank #2 and a market cap of $19.6 billion. The company’s current-year earnings are expected to grow at a rate of 34%.
Cathay General Bancorp (CATY - Free Report) , based in Los Angeles, CA, carries a Zacks Rank #2 and has a market cap of $3.4 billion. The company’s 2018 earnings are projected to increase at a rate of 28.1%.
With market cap of $4.1 billion, Hancock Holding Company has a Zacks Rank #2. This Gulfport, MS-based company’s earnings are expected to be up at a rate of 30.8% for 2018.
Signature Bank (SBNY - Free Report) , headquartered at New York, sports a Zacks Rank #1 and has a market cap of $7.2 billion. The company’s 2018 earnings are expected to rise at a rate of 24.9%.
UMB Financial Corporation (UMBF - Free Report) , based in Kansas City, MO, carries a Zacks Rank #2 and has a market cap of $3.6 billion. The company’s earnings are expected to increase at a rate of 20.3% for 2018.
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