Powell’s hawkish remarks, others bode well for banks: 3 picks – March 25, 2022
The Federal Reserve is ready to take whatever action is necessary to fight record inflation. Earlier this week, at the National Association for Business Economics’ 38th Annual Economic Policy Conference “Policy Options for Sustainable and Inclusive Growth”, Jerome Powell said, “In particular, if we conclude that it is appropriate to act more aggressively by raising the fed funds rate by more than 25 basis points at a meeting or meetings, we will.
Along the same lines, other policymakers are considering taking “faster” steps to tighten monetary policy to control accelerating inflation, which is currently at its highest level in 40 years. Some of them are St. Louis Federal Reserve Chairman James Bullard, Richmond Federal Reserve Chairman Tom Barkin, Christopher J. Waller, a member of the Board of Governors of the Federal Reserve System and former Chairman of the Minneapolis Federal Reserve, Neel Kashkari.
In this context, banking stocks are the clear winners as they thrive in a rising interest rate environment. So we are discussing three banking stocks – Associated Bank-Corp (BSA – free report), Citizens Financial Group (CFG – free report) and Hancock Whitney Society (HWC – Free report) – who will benefit from higher interest rates.
Such aggressive comments after the announcement of the first interest rate hike since 2018 show the central bank’s intention to control the price spike at all costs. Amid these hawkish remarks, the CME FedWatch Tool is already showing more than a 70% chance of a 50 basis point hike in May, well above the 44% chance of a similar hike a week ago. .
Although, like other sectors, banking stocks have plunged on broader geopolitical concerns stemming from the ongoing conflict between Russia and Ukraine, rising interest rates and corporate expansion efforts will support their finances. The KBW banking index is down 4.7% year-to-date, in line with broader bearish sentiments in the market.
The Zacks Finance sector (of which banks make up the bulk) is currently trading at a tangible price/book value of 4.51X, well below the broader market average of 15.82X. Thus, depressed stock prices and cheap valuation provide a good entry point for investors.
The shortlisted banks currently have a Zacks rank #2 (buy) and a value score of B. Our research shows that stocks with a value score of A or B, when combined with a Zacks rank #1 (strong buy ) or #2 , offer the best investment opportunities for investors. You can see the full list of today’s Zacks #1 Rank stocks here.
Additionally, these banks have a market capitalization of over $3 billion and have outperformed the broader market so far this year.
Year-to-date price performance
Image source: Zacks Investment Research
Associated Bank-Corp: Based in Green Bay, WI, ASB provides a full range of financial products and services through more than 200 banking offices. The company’s organic and inorganic growth efforts should continue to improve profitability.
Associated Banc-Corp is experiencing steady improvement in revenue. Although total revenue fell last year, the company expects the expansion of its lending capabilities (as part of its new strategic plan) to help generate additional revenue. Management expects net interest income to exceed $800 million and non-interest income to exceed $300 million this year.
ASB has taken several measures to improve operational efficiency. In September 2021, it announced a new expansion plan, which will strengthen operating leverage and improve lending and digital capabilities. The company expects net total revenue to register a CAGR of around 8% from the end of 2021 to 2023.
Given a strong balance sheet position, Associated Banc-Corp, which has a market capitalization of $3.5 billion, is well positioned to grow through strategic buyouts. In 2020 the company acquired First Staunton Bancshares, while in 2019 it took over 32 branches in Wisconsin. These, along with other past transactions, are expected to be accretive to its earnings.
So far this year, ASB shares are up 3.4%. Additionally, the Zacks consensus estimate for 2022 earnings has been revised up 3.6% in the past two months to $1.71.
Citizen Financial: One of the largest retail banking holding companies in the United States, Citizens Financial has nearly 940 branches and 3,000 ATMs in 11 states in the New England, Mid-Atlantic and Midwest regions. It has a market capitalization of $21.1 billion.
Last February, it acquired 80 East Coast branches and the national online deposit business of HSBC bank, strengthening its balance sheet position. In July 2020, Providence, RI-based CFG signed an agreement to acquire Bancorp Investors (VSI – Free report) with the aim of strengthening its banking franchise. The ISBC acquisitions, combined with the HSBC branches, create a strong franchise in the New York and Philadelphia metro areas and in New Jersey by adding 234 branches. Additionally, the acquisitions are expected to add $29 billion in deposits and $24 billion in loans, creating a solid foundation for revenue growth.
That aside, the company is undertaking strategic buyouts to broaden the fee income mix and diversify revenue. These initiatives enable CFG to expand its product capabilities and geographic reach.
Besides inorganic growth moves, strong loan and deposit balances are likely to help the company’s finances. CFG’s loans and deposits recorded a CAGR of 3.7% and 11%, respectively, over the last three years (2019-2021). The company improved its deposit base by advancing its deposit collection capabilities and digital model focused on national expansion.
The Zacks consensus estimate for CFG earnings in 2022 has been revised up 1.4% over the past 60 days to $4.46. Year-to-date, the company’s shares have gained 2.9%.
Hancock Whitney: As a bank and financial holding company, HWC operates through 177 full-service bank branches and 240 ATMs in Mississippi, Alabama, Louisiana, Florida and Texas. Supported by the continued rise in loan balances and inorganic growth efforts, the company’s bottom line should continue to improve.
Hancock Whitney remains focused on its revenue growth strategy. Revenue (on a tax-equivalent basis) grew at a CAGR of 6.9% over the past six years (ending 2021). Total loans recorded a CAGR of 4.8% over the same period. Decent economic growth and a gradual increase in demand for loans will support turnover.
The company’s strategic investments in growth and new markets should strengthen its revenue and help achieve a 55% efficiency ratio by the end of the fourth quarter of 2022. Management expects total loan growth basis of 6 to 8% this year.
In addition to organic expansion efforts, HWC has undertaken acquisitions in the past, which continue to support its finances. Given the strength of its balance sheet, the company is well positioned to continue growing through inorganic means to diversify revenue and improve market share.
The Zacks consensus estimate for 2022 earnings has been revised up nearly 1% in the past 60 days to $5.29. So far this year, HWC shares have gained 5.9%. The company has a market cap of $4.5 billion.