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5 Banks to Buy With Fed on Track for Another 75-Bps Rate Hike

The two-day FOMC meeting begins today. Market participants expect the Federal Reserve to raise interest rates by 75 basis points (bps) for the third consecutive time to control the widespread and stubborn inflation.

After increasing the interest rates by 225 bps (in aggregate) so far this year, it was expected that the central bank will take a breather. But following the release of still red-hot inflation numbers last week, a smaller 50 bps rate increase is off the tables. Per the CME FedWatch Tool data, there is an 84% chance that the Fed will raise the interest rates by 75 bps tomorrow, up from the 69% probability a week ago.

Against this backdrop, it is advisable to invest in banks as they thrive in a rising interest rate environment. Hence, we have selected – Wells Fargo & Company WFC, East West Bancorp, Inc. EWBC, Zions Bancorporation ZION, BOK Financial Corporation BOKF and Valley National Bancorp VLY – as these will benefit from higher interest rates.

Yet, some serious near-term concerns, including the ongoing Russia-Ukraine conflict, supply chain disruptions and fears of economic slowdown/recession in the coming six-nine months, have spooked the investors. Amid such a grim backdrop, bank stocks seem to be well-placed on rising interest rates and a steady increase in loan demand.

Here’s How We Selected These Banks

To choose these banks, we ran the Zacks Stocks Screener to identify stocks with a market cap of $5 billion or more. Further, so far this year, these banks have lost 15% or less.

Moreover, these banks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These five banks also have a Value Score of B. The Value Style Score condenses all valuation metrics into one actionable score, which helps investors steer clear of 'value traps' and identify stocks that are truly trading at a discount.

Year-to-Date Price Performance

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Our Picks

San Francisco-based Wells Fargo is one of the largest financial services companies in the United States. The company offers services across North America and globally through more than 4,500 retail bank branches and broad automated telling machines (ATMs) network.

Wells Fargo continues to build on its deposit base. While the pace of deposit growth is likely to continue moderating in the near term, the considerable strength in its consumer business and commercial banking segments will likely support the deposit balance in the upcoming period. WFC is focused on lowering its expense base by streamlining organizational structure, consolidating branches and reducing headcount by optimizing operations and other back-office teams. Realized and identified potential gross savings through these efforts are expected to be in excess of $10 billion.

Wells Fargo, with a market cap of $166.7 billion, has lost 7.7% in the year-to-date period. While the company’s earnings are expected to decline 19.2% for 2022, the same is projected to rebound and grow 28.5% for 2023.

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. Based in Pasadena, CA, EWBC operates through more than 120 locations in the United States and China.

East West Bancorp is focused on its organic growth strategy. Continued rise in demand for loans, rising interest rates and an improving economy are expected to keep supporting net interest income in the upcoming quarters. Further, a strong balance sheet position and investment-grade credit ratings are likely to keep supporting the company’s financials.

Shares of EWBC, which has a market cap of $10.2 billion, has lost 5.7% so far this year. For 2022, the company’s earnings are projected to witness year-over-year growth of 27.7%. For 2023, earnings are expected to rise 15%.

Based in Salt Lake City, UT, Zions is a diversified financial service provider. The company operates through a network of more than 400 branches across 11 western states, namely Utah, Idaho, California, Nevada, Arizona, Colorado, Texas, New Mexico, Washington, Oregon and Wyoming.

Robust loans and deposit balance, and higher interest rates should keep aiding revenues. In the rising interest rate environment, Zions’ net interest margin is likely to witness decent improvement. Business simplifying initiatives and a robust balance sheet position are the other positives. Further, given the earnings strength, Zions is likely to continue meeting debt obligations, even if the economic situation worsens.

In the year-to-date period, ZION has lost 7.6%. While the company’s earnings are expected to decline 12.2% for 2022, the same is projected to rebound and grow 17.9% for 2023. The company has a market cap of $9.7 billion.

BOK Financial, headquartered in Tulsa, OK, is a regional financial services company. The company provides commercial banking, consumer banking and wealth management services.

Amid a competitive banking environment, when most banks have been facing challenges in achieving decent loan growth, BOK Financial was able to post continuous loan growth on a diverse business model and increase in loans to individuals. Given the strong loan pipelines, higher rates and decent economic growth, it will be well-poised for organic growth. Improving asset quality, sound liquidity and inorganic expansion efforts boost the company’s growth prospects.

While BOKF’s earnings are expected to fall 21.6% for 2022, the same is projected to rebound and grow 11.4% for 2023. Shares of the company, which has a market cap of $6.2 billion, have lost 11.4% so far this year.

Based in Wayne, NJ, Valley National is the holding company for Valley National Bank, which offers various commercial, retail, insurance and wealth management financial services products. For more than 30 years, VLY has been engaged in strategic acquisitions that substantially supported its financials.

Valley National’s organic growth trajectory, higher rates and digitization efforts will aid financials. Supported by a solid balance sheet, the company will keep expanding inorganically as well. These deals, along with several past acquisitions, are expected to be earnings accretive and help it diversify revenues and footprint. VLY remains focused on evaluating its branch network, which along with a strong balance sheet and manageable debt level, is a major tailwind.

For 2022, VLY’s earnings are projected to witness year-over-year growth of 12.1%. For 2023, earnings are expected to rise 13.5%. The company has a market cap of $6 billion. Its shares have declined 12.8% in the year-to-date period.


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Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
BOK Financial Corporation (BOKF) : Free Stock Analysis Report
 
Zions Bancorporation, N.A. (ZION) : Free Stock Analysis Report
 
East West Bancorp, Inc. (EWBC) : Free Stock Analysis Report
 
Valley National Bancorp (VLY) : Free Stock Analysis Report
 
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