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Fed Lifts Interest Rates, Signals 6 More Hikes: 3 Bank Picks

·7 min read

As expected, the Federal Reserve, at the end of the two-day FOMC meeting, lifted the interest rates by 25 basis points (bps) for the first time since 2018. The central bank, which is already behind the curve, is taking an aggressive approach to tame the red-hot inflation and has signaled six more hikes this year.

Banks, the biggest winners of the interest rate hike, were among the best-performing stocks in the S&P 500 Index in yesterday's trading session. The KBW Bank Index gained 3.6% and the S&P 500 Financials Sector Index was up 2.8%, in line with the broader market positive sentiments. So, today we have shortlisted three banks – First Citizens BancShares, Inc. FCNCA, Signature Bank SBNY and Washington Federal, Inc. WAFD – that have solid prospects and will benefit from rising interest rates.

Fed’s More Hawkish Stance

With the inflation going out of control (the consumer price index increased 7.9% in February, the highest in 40 years) and the ongoing Russia-Ukraine conflict putting further upward pressure on the same, the Fed is ready to take an aggressive approach. While all the officials agreed to raise interest rates this time, one policymaker, St. Louis Fed President James Bullard, dissented in favor of an even more aggressive stance.

The Fed officials are now seeing the fed fund rates in the range of 1.75-2.00% by 2022-end, suggesting a 25-bps hike in all the remaining six FOMC meetings this year. In the news conference following the FOMC meeting, Fed Chair Jerome Powell said, “"The way we're thinking about this is that every meeting is a live meeting" in terms of an interest rate hike.

Yet, even with such an aggressive stance to control ragging inflation, the central bank projects inflation to remain at 4.3% this year and then fall to 2.7% next year and 2.3% in 2024. Thus, more interest rate hikes are definitely in the cards next year and in 2024 to tame inflation and support the economy.

Disappointing Economic Growth

On the economic front, there is a slight dismal outlook. The central bank, in the policy statement, noted “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

Per the latest Summary of Economic Projections, the U.S. economy is now projected to grow at the rate of 2.8% this year, way below the prior expectation of 4% growth. This could turn out to be a cause of concern as banks’ financials are directly affected by the nation's health.

Yet, the central bank had kept the economic growth projection for 2023 and 2024 unchanged at 2.2% and 2%, respectively.

3 Bank Winners

The shortlisted banks currently carry a Zacks Rank #1 (Strong Buy) or #2 (Buy) and have a market cap of in excess of $2 billion. These three banks are expected to witness more than 20% growth in earnings 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
Zacks Investment Research


Image Source: Zacks Investment Research

Based in Raleigh, NC, First Citizens BancShares is one of the top 20 largest banks (in terms of assets) in the United States, following its merger with CIT Group Inc. earlier this year. The combined company will have more than $100 billion in assets on a proforma basis, approximately 600 branches in 22 states and a national direct bank.

This apart, FCNCA has witnessed solid revenue growth. Over the last five years, the same witnessed a CAGR of 5.8% (ended 2021). Given the synergies from the CIT Group deal, rising interest rates and improvement in demand for loans, First Citizens BancShares’ top line is expected to continue improving in the quarters ahead.

Further, First Citizens BancShares has a solid capital deployment plan driven by a robust liquidity position. As of Dec 31, 2021, it had a borrowing of $1.78 billion with just $590 million short term in nature. As of the same date, cash and cash equivalents balance was $337.8 million. The company has been paying 47 cents per share as quarterly dividend since December 2020. Prior to that, it paid 40 cents per share.

The stock, with a market cap of $11.8 billion, has declined 8.7% in the year-to-date period. Over the past month, FCNCA’s 2022 earnings estimates have been unchanged at $79.62. This suggests a 47.8% jump from the year-ago recorded number.

Signature Bank is a New York-based full-service commercial bank with 37 private client offices located in the New York metropolitan area, Connecticut, California and North Carolina. Founded in 2001, SBNY became a member of the S&P 500 Index on Dec 20, 2021. It has a market cap of $17.9 billion.

Signature Bank has been focusing on cutting-edge technologies to adapt and adopt the expansion of its digital assets business. It is the first FDIC-insured bank to launch a blockchain-based digital payments platform, Signet.

Such dynamic moves by this Zacks Rank #1 company are fueling deposit growth. Deposits witnessed a five-year (2017-2021) CAGR of 33.5%, while net loans recorded a CAGR of 18.7% in the same period. Thus, deposit and loan balances are poised to increase further with support from a gradually improving economy and efforts to diversify lending segments.

Driven by these favorable developments, NII witnessed a compound annual growth rate (CAGR) of 11% over the last five years (ended 2021). The uptrend resulted from the rise in average interest-earning assets, backed by robust average deposit and loan growth. Hence, Signature Bank is well-positioned to maintain its revenue momentum given its client-centric business model and expansion in strategic markets.

So far this year, shares of SBNY have lost 0.9%. The Zacks Consensus Estimate for 2022 earnings has been revised marginally upward over the past 30 days to $19.57. This indicates year-over-year growth of 30.2%.

Headquartered in Seattle, WA, Washington Federal operates as a non-diversified unitary savings and loan holding company. It conducts operations through its federally insured savings and loan association subsidiary, WaFd Bank.

Washington Federal, which currently carries a Zacks Rank of 2, is focused on its organic growth efforts, with revenues witnessing a CAGR of 3.5% over the last six fiscal years (2016-2021). The upswing was largely driven by improving net loan balances, which saw a CAGR of 6.9% over the same time frame. Given the robust loan demand and solid economic growth, the company’s top line is expected to continue improving in the quarters ahead.

WAFD’s balance sheet position remains solid. As of Dec 31, 2021, the company had total debt worth $1.72 billion and cash and cash equivalents worth $1.88 billion. Given the company’s decent earnings strength and liquidity position, Washington Federal is expected to continue meeting debt obligations, even if the economic situation worsens.

Washington Federal’s strong balance sheet position and its trend of returning capital to shareholders are expected to boost investors’ confidence in the stock. The bank has been increasing its quarterly dividend on a regular basis, with the latest one announced in January 2022. Also, as of Dec 31, 2021, it had 3.7 million shares remaining under the buyback authorization.

The stock, with a market cap of $2.3 billion, rallied 5.5% so far this year. WAFD’s earnings estimates for fiscal 2022 have been unchanged over the past 30 days at $2.92. This implies a 22.2% year-over-year increase in earnings.


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