Yields Rise on Likely Rise in Interest Rates: 3 Bank Stock Choices


Since last week, the yield on 10-year Treasuries has continued to recover. It hit 1.56% yesterday, the highest level since June. This, along with the expectation of a likely hawkish position from the Federal Reserve, has sparked traders’ interest in bank stocks, with the KBW Nasdaq Bank Index climbing 6.4% in the past five days. With this, the index has gained 36.3% during the period since the start of the year.

Specifically, at the end of the two-day FOMC meeting on September 22, the Fed signaled that interest rates could rise in 2022, a year earlier than expected, and an official decision to cut purchases of bonds could be announced in November 2021. meeting, if recovery progress remains on track. This time, he left the key rate unchanged at close to zero and announced that the pace of asset purchases would be maintained at the current level.

In addition, according to the latest summary of the Fed’s economic projections, the US economy will grow by 5.9% for 2021, up from the 7% previously mentioned. Nonetheless, projections for 2022 and 2023 have improved to 3.8% and 2.5% from the 3.3% and 2.4% previously mentioned.

Based on updated economic projections, the central bank now expects inflation to be 4.2% this year, above its 2% target, and significantly above the previously projected rate of 3.4% . Nonetheless, he said economic growth had “continued to strengthen” and he expects the unemployment rate to continue falling through 2021 and over the next two years.

Thus, after having faced a difficult operating environment since the start of the pandemic, shares of US banks are now well placed to initiate a robust recovery, thanks to the slightly hawkish stance of the central bank. This is likely to lift all the boats for the banks and increase the profits of the lenders.

Here’s how developments are laying the groundwork for banks

The current low interest rate environment affects banks’ net interest margins, as they are reluctant to invest excess long-term liquidity and instead accumulate liquidity in short-term liquidity and low-income cash equivalents. With rising interest rates in cards, banks are likely to shift their combination of income and assets away from these low-yielding investments, which will increase margins and improve investor sentiment towards banks.

The Fed hinting at a rate hike in 2022 will support bank finances over time as we know banks thrive in a rising interest rate environment. In addition, the steepening of the yield curve and a gradual increase in demand for loans are expected to promote growth in interest income, which constitutes a significant share of bank revenues, as well as growth in margins.

In addition, the Fed’s withdrawal from asset purchases signals the first step towards a possible increase in short-term rates, which improves the outlook for banks’ net interest margin and profitability.

Finally, the central bank’s more favorable economic growth projections for 2022 and 2023 are indicative of robust economic growth. Improving the nation’s overall health is also likely to strengthen bank finances. In the current context of the likelihood of a higher interest rate environment going forward, many banks have made deliberate efforts to increase the sensitivity of their assets. It should also fuel growth.

3 bank stocks to buy now

Given the discussion above, perhaps now is the time to build up some fundamentally strong bank stocks. While it can be a daunting task, we have selected three bank stocks with the help of the Zacks Stock Screener.

These companies have a profit growth projection of over 10% for 2021. The companies currently carry a Zacks Rank # 2 (Buy). You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.

Additionally, these banks have a market capitalization of $ 5 billion or more and have experienced price appreciation of 15% or more so far this year.

Image source: Zacks Investment Research

JPMorgan Chase & Co. JPM: One of the world’s largest banks, with assets valued at $ 3.6 trillion, has strived to strengthen its loan portfolio and acquire the industry’s best deposit franchise. The banking giant is also expanding its presence in new regions by opening branches and on a wave of acquisitions to diversify revenues. These will help it seize cross-selling opportunities by increasing its presence and benefit from the growth of the card and auto loan industries as part of the continued normalization of trading activities.

Its capital deployment activities also appear impressive, with the recent 11.1% dividend increase and $ 30 billion share buyback approval for 2021. Its market capitalization is around $ 499 billion. The company’s profits are expected to jump 58.2% this year.

State Street Society STT: Favorable winds in interest rates and economic growth could bolster the bank’s interest income, while efforts to strengthen commission income sources are also encouraging. , thus contributing to the growth of turnover. The company is also taking the route of inorganic expansion to increase its sales.

For the third quarter, the company expects overall commission revenue growth of 7-8% year-over-year, with service and management fee growth of 7-9% each. Net interest income is expected to be between $ 460 million and $ 470 million. It has a market capitalization of $ 32.4 billion. The company’s profits are expected to rise 10.8% this year.

OZK Bank OZK: The company’s business restructuring and branch consolidation initiatives are expected to continue to support revenue growth. Thanks to its expansion strategy, OZK Bank has been able to steadily increase the deposit and loan balances. With a more favorable operating environment, the company is well placed to continue these trends.

In July 2021, he increased the dividend for the 44th consecutive quarter. In addition, the company announced a share buyback program to repurchase shares worth up to $ 300 million through July 1, 2022. These impressive capital deployment activities boost shareholder confidence in the action. It has a market capitalization of $ 5.7 billion. The company’s profits in 2021 are expected to increase 86.3%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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