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Fed to Hike Rates Until Inflation Comes Down: 3 Banks to Watch

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·7 min read
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The Federal Reserve’s chairman Jerome Powell has indicated that the central bank will keep raising interest rates until inflation is tackled. Yesterday, at a Wall Street Journal event, he pledged that the Fed will keep pushing and might raise rates as high as required to curtail the surge in inflation.

He stated, “What we need to see is inflation coming down in a clear and convincing way and we're going to keep pushing until we see that. If we don't see that, we will have to consider moving more aggressively. Achieving price stability, restoring price stability, is an unconditional need. It’s the bedrock of the economy really.”

Since bank stocks are clear winners in a rising rate environment, today we are discussing three bank stocks with solid prospects — SVB Financial SIVB, Prosperity Bancshares, Inc. PB and Hancock Whitney Corporation HWC.

In order to tackle the red-hot inflation, the Fed already raised interest rates by 25 basis points (bps) in March and by 50 bps this month (the biggest move in more than two decades), following which short-term interest rates now lie at 0.75-1.00%. During the 50-bps rate hike, the central bank had ruled out the chance of a larger hike. At that time, Powell stated that a 75-bps hike is “not something that the committee is actively considering” and hinted at the possibility of further hikes of 50 bps each in the next two meetings in June and July.

While presenting his most hawkish remarks to date, Powell yesterday acknowledged the pain that such a move might cause to the economy in terms of slower economic growth or higher unemployment. Therefore, Powell said that there would likely be “pathways” for the pace of the rate hikes to curb the inflation pressures without a full-blown recession. But, if inflation does not fall as expected, the Fed will not hesitate to raise rates.

Powell added, “If that involves moving past broadly understood levels of 'neutral' we won't hesitate to do that. We will go until we feel we are at a place where we can say 'yes, financial conditions are at an appropriate place, we see inflation coming down.”

In addition to being highly attentive to inflation risks, Fed officials are taking note of the geopolitical concerns arising from the ongoing Russia-Ukraine war and supply-chain disruptions due to the COVID-related lockdowns in China.

Banks to Keep an Eye on

The three shortlisted banks are not only expected to benefit from higher rates but also have solid fundamentals. Along with the rate hike expectations, a continued rise in the demand for loans, decent economic growth and business-diversification efforts will likely aid banks’ top-line growth.

Banks, which have seen their margins getting hurt since the start of the pandemic in mid-March 2020 due to the near-zero interest rates, will likely witness improvement in net interest margins (NIM) as well as net interest income (NII).

The shortlisted banks have a market capitalization of more than $2 billion and currently carry a Zacks Rank #3 (Hold). These banks are expected to witness earnings growth in 2022 as well as 2023. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SVB Financial has a market cap of $25.4 billion. It remains focused on its organic growth strategy, as evident from a consistent rise in loans, deposits and NII over the past several years. The company’s net loans saw a CAGR of 41.6% over the last three years (2019-2021). NII and deposits witnessed a CAGR of 23.1% and 28.5%, respectively, over the same time frame. Further, improving non-interest income will likely keep aiding top-line growth.

For 2022, management projects average loans to grow in the mid-30s and average deposit balances to rise in the low-40s. NII is anticipated to grow in the low-50s, while NIM is projected to be 2.10-2.22%.

SVB Financial is expanding through strategic buyouts, which will continue supporting its position as one of the foremost providers of financing solutions to innovative companies. In its efforts to expand into technology investment banking, it acquired technology equity research firm, MoffettNathanson, in December 2021. In July, it acquired Boston Private, which is expected to further strengthen its private bank and wealth management offerings.

SIVB has also been undertaking efforts to expand globally. While its U.K. and Asia operations seem to be growing, the businesses in Canada and Germany are expected to further boost revenues. Its international (reflects operations in the U.K., Europe, Israel, Asia and Canada) core fee income witnessed a five-year (ended 2021) CAGR of 34%.

For 2022, the company’s earnings are projected to witness year-over-year growth of 5.9%. For 2023, earnings are expected to rise 32.1%.

Prosperity Bancshares, with a market cap of $6.2 billion and 272 full-service banking centers, provides a wide range of financial products and services — traditional loan and deposit products — to small and medium-sized businesses and consumers. The company also provides digital banking solutions, credit and debit cards, mortgage services, retail brokerage services, trust and wealth management, and treasury management.

Driven by solid loan balances and efforts to improve fee income, PB’s net revenues have witnessed a CAGR of 11.5% over the five years between 2017 and 2021. The company has also been able to improve its deposit mix. As of Mar 31, 2022, 34.7% of total deposits were non-interest-bearing deposits. Driven by robust loan demand, a solid deposit mix and a rise in fee income, the company’s top-line growth is expected to continue in the quarters ahead.

Acquisitions remain another major contributor to Prosperity Bancshares’ top-line growth. Over the years, the company has significantly expanded its operations through the buyout of community banks and branches of other banks. Since 1998, it has completed more than 30 deals.

For 2022 and 2023, the company’s earnings are projected to grow 0.4% and 6.9%, respectively, on a year-over-year basis. Supported by a solid capital position, PB’s capital deployment activities remain impressive. It has been increasing its dividend annually since 1999, with the latest hike announced in October 2021. Moreover, in January 2022, it announced a share repurchase program (expiring on Jan 18, 2023) to buy back up to 4.6 million shares.

Hancock Whitney operates through 177 full-service bank branches and 240 automated teller machines across Mississippi, Alabama, Louisiana, Florida, and Texas. With a market cap of $4 billion, the company 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. Robust economic growth and a rise in loan demand will likely continue to support the top line.

The company’s strategic investments in growth and new markets are also expected to bolster its top line and help achieve an efficiency ratio of 55% by the end of fourth-quarter 2022.

For 2022, management expects total core loans (excluding Paycheck Protection Program loans) to rise 6-8% year over year, with quarterly performance affected by seasonality. Total deposits are expected to be flat or slightly down from the 2021 level. NIM is expected to widen on the back of expected future rate hikes.

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.

For 2022, HWC’s earnings are projected to witness year-over-year growth of 1.3%. For 2023, earnings are expected to rise 1.7%.


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