A higher interest rate regime will begin soon: 5 picks from banks – March 15, 2022
The Fed’s next round of two-day FOMC meetings will begin on March 15. At this crucial meeting, the Fed will raise the benchmark interest rate for the first time in three years. Rising inflation, which is currently at its highest level in 40 years, forced the Fed to end its $120 billion monthly bond-buying program and raise interest rates in March.
A higher interest rate will benefit the financial sector, especially banks. At this stage, it will be prudent to invest in bank stocks with a favorable Zacks Rank. Here are five such actions – Signature Bank (SBNY – free report), First Financial Bankshares Inc. (END – free report), Associated Bank-Corp (BSA – free report), Commerce Bancshares Inc. (CBSH – free report) and Cullen/Frost Bankers Inc. (CFR – free report).
Focus on the Fed’s FOMC
Fed Chairman Jerome Powell will announce the FOMC’s decision at a press conference on March 16 at 2:00 p.m. EST. Meanwhile, market participants are uncertain about the magnitude of the rate hike. Just a month ago, most market pundits believed the first rate hike would be as high as 50 basis points.
However, Fed Chairman Jerome Powell said a 25 basis point hike was expected in March. However, the central bank could increase the magnitude going forward this year, if it fails to contain inflation at the desired level.
Meanwhile, the ongoing war between Russia and Ukraine has complicated the situation. The geopolitical conflict has raised the prices of several commodities to record highs. Crude oil, nickel, palladium, copper and aluminum prices soared. Steel and coal prices are also rising. In the food grains segment, the price of wheat jumped.
Rising commodity prices will aggravate inflation. At the same time, the war will disrupt the already devastated global supply chain system, which is the main source of current inflation. Several economists and financial experts have warned that prolonged supply chain disruptions and higher interest rates could reduce US economic growth. Higher inflation and lower growth can lead to stagflation.
In addition to the rate hike, the Fed could also give an indication of the timing and process of reducing its $9 trillion balance sheet. On March 14, the yield on the US 10-year Treasury note soared to 2.139%, its highest level since June 11, 2019.
Banks likely to benefit
A rise in interest rates will increase the cost of funds, allowing the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, and shorter-term liabilities. term, thereby increasing profit margins.
Banks have witnessed a contraction in net interest margins (an important barometer for assessing the financial performance of banks) due to rates approaching zero. It also hurts their revenue growth.
Therefore, as the Fed begins to raise interest rates, pressure on margins will gradually ease and support banks’ net interest income. Despite the diversification of income streams, banks derive a large part of their income from interest income.
We expect the US economy to become fully operational as the pandemic is expected to peak this winter. Several major investment bankers and fund managers have already begun removing pandemic-related adjustments from their financial models. As a result, as the economy operates at full capacity, banks will generate more business.
Following the rise in sovereign bond yields, on March 14, the S&P Financials Select Sector SPDR ((XLF – Free report) gained 1.3%. In addition, the SPDR S&P Regional Banking ETF (KRE – Free Report), the SPDR S&P Bank ETF (KBE – Free Report) and the KBW Nasdaq Bank Index (BKX) rose 0.5%, 0.5% and 1.7% respectively.
Our top picks
We limited our search to five banking stocks with strong long-term growth potential. These stocks have seen positive revisions to earnings estimates for the current year over the past 30 days.
These banks are regular dividend payers who will act as an income stream in the event of a market downturn. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the full list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year-to-date.
Image source: Zacks Investment Research
Signature Bank offers commercial banking products and services. Loan growth in the small business administration lending segment, mortgage warehousing business, commercial real estate and fund banking should support SBNY’s balance sheet strength. This, combined with rising deposits, sets the stage for Signature Bank’s net interest income growth in the coming quarters.
Signature Bank forecasts a profit growth rate of 30.2% for the current year. The Zacks consensus estimate for current-year earnings has improved 0.9% over the past 30 days. SBNY has a current dividend yield of 0.8%.
First Financial provides commercial banking products and services in Texas. FFIN accepts checking, savings and money market accounts and term deposits. First Financial also offers drive-thru and overnight deposit services, remote deposit capture, internet and mobile banking, payroll cards, money transmission and other customary commercial banking services, as well as ATMs and safes.
Although First Financial has a negative expected earnings growth rate for the current year, the Zacks consensus estimate for current year earnings has improved by 1.4% over the past 30 days. FFIN has a current dividend yield of 1.3%.
Associated Bank-Corp provides various banking and non-banking products to individuals and businesses in Wisconsin, Illinois and Minnesota. ASB’s new strategic plan will expand its lending capabilities, support core business growth and help transform digital skills. Robust loan growth, efforts to focus on fee income and inorganic expansion initiatives are also likely to support Associated Banc-Corp’s finances.
Although ASB has a negative expected earnings growth rate for the current year, the Zacks consensus estimate for current year earnings has improved by 1.2% over the past 30 days. Associated Banc-Corp has a current dividend yield of 3.5%.
Bancshares Trading provides retail, mortgage banking, corporate, investment, trust and asset management products and services to individuals and businesses in the United States. CBSH’s strong loan and deposit balances, along with efforts to strengthen fee income should support revenue growth. Commerce Bancshares is expected to continue to build shareholder value through its efficient capital deployment activities, which reflect a strong balance sheet and liquidity.
Although Commerce Bancshares has a negative current year earnings growth rate expectation, Zacks’ consensus estimate for current year earnings has improved by 0.8% over the past 30 days. CBSH has a current dividend yield of 1.5%.
Cullen/Frost offers commercial and consumer banking services in Texas. Organic growth remains a key strength of CFR, as evidenced by its track record of revenue growth. The economic recovery should also boost loan and deposit balances, further contributing to revenue. Efforts to strengthen Cullen/Frost’s presence in the lucrative Texas markets through the opening of strategic branches and initiatives to further diversify its consumer loan portfolio will likely support loan portfolio growth.
Although Cullen/Frost has a negative current-year expected earnings growth rate, the Zacks consensus estimate for current-year earnings has improved 3.9% over the past 30 last days. CFR has a current dividend yield of 2.2%.