3 banking actions for 2022 with the Federal Reserve in the spotlight – December 10, 2021

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All eyes are on the Federal Reserve, as the two-day FOMC political meeting is scheduled for December 14-15. There has been growing speculation among market participants that the central bank’s monetary policy stance is likely to become a bit more hawkish.

This, along with diminishing fears of the Omicron COVID variant, has turned the tide in favor of banks. Today, we choose three banking stocks – Bank of America (BAC Free report), East West Bancorp, Inc. (EWBC Free report) and Western Alliance Bancorporation (WAL Free report). These banks are fundamentally strong and will benefit from robust economic growth, growing demand for loans and higher interest rates.

Beginning in November, the Fed began cutting its $ 120 billion bond purchase program, with plans to end quantitative easing in June 2022. Subsequently, the first rate hike interest since March 2020 was not expected until the second half of next year.

Nonetheless, on November 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said, “At this point the economy is very strong and inflationary pressures are higher, so it is appropriate. , in my opinion, to consider entering into the reduction. our asset purchases, which we actually announced at the November meeting, perhaps a few months earlier. Powell also got rid of his long-held “inflation is transitory” remark.

Thus, this will allow the central bank to raise rates earlier. According to data from the CME FedWatch Tool, there is currently an 80.8% chance that the Fed will raise interest rates by 25 basis points (bps) in June 2022. Additionally, market participants are forecasting two further rate hikes of 25bp each. following the June hike.

Banks are thriving in the rising rate environment. Thus, banks, which have seen a decline in net interest margin and net interest income (NII) since March 2020, should benefit. Improving the economy, increasing demand for loans, and efforts to diversify operations will also support banks’ financial performance in the future.

Our choices

Given these favorable developments, now is the right time to buy bank stocks to generate solid returns in 2022 and beyond.

Shortlisted banks have a long-term (three to five year) profit growth rate of 5% or more and a market capitalization of at least $ 10 billion. Additionally, all three banks currently have a Zacks Rank # 2 (Buy). You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.

So far this year, these banks have outperformed both the Zacks Finance sector rally by 21.1% and the S&P 500 index gain of 26.2%.

Price performance since the start of the year

Image source: Zacks Investment Research

Bank of America is one of the largest banks in the United States. With total assets of $ 3.09 trillion as of September 30, 2021, this Charlotte, North Carolina-based bank offers a diverse range of banking and non-banking financial services and products in North America and across the world.

LAC is in the process of opening 500 centers in new cities and redesigning existing centers with improved technology. These efforts, along with the success of Zelle and Erica, have enabled the company to improve digital offerings and cross-sell products. The acquisition of Axia Technologies will strengthen its healthcare payment business.

The company is also profiting massively from the global trading frenzy. With trading and underwriting activity likely to continue at a strong pace and the investment banking (IB) pipeline remaining strong, BAC is expected to experience steady growth in IB fees.

Prudent cost management continues to support LAC’s finances. In recent quarters, Bank of America has incurred an average of $ 14 billion in spending, despite implementing strategic growth initiatives.

In July 2021, following Fed approval, Bank of America announced a dividend hike from 17% to 21 cents per share. In October, its $ 25 billion share buyback plan was also renewed.

With a market capitalization of $ 361.4 billion, Bank of America’s efforts to improve revenues, strong balance sheet, and expansion into new markets will help financial services. The stock has gained 46.8% so far this year. LAC’s projected long-term earnings growth rate of 7% promises rewards for shareholders.

Based in Pasadena, California, Bancorp East West serves as a financial bridge between the United States and China by providing various consumer and business banking services to the Asian-American community. EWBC operates in more than 120 locations in the United States and China.

East West Bancorp is focusing on its organic growth strategy. Although the company’s NII, which is the main source of its revenue, declined in 2020, it has registered a CAGR of 5.1% over the past four years (2017-2020). Momentum has also persisted in the first nine months of 2021. Improving loans and deposits should further support the NII.

East West Bancorp has a strong balance sheet. In addition, investment grade credit ratings from BBB and stable outlook from S&P and Fitch Ratings make EWBC favorable access to debt markets.

East West Bancorp’s capital deployment activities appear impressive. In January, the company increased its quarterly dividend from 20% to 33 cents per share. EWBC has also implemented a share buyback plan. As of September 30, 2021, there was still $ 354.1 million in shares to be repurchased under the repurchase plan.

Growth in loans and deposits, along with a strong balance sheet, should continue to support East West Bancorp’s finances. The stock, with a market cap of $ 11.1 billion, has jumped 54.6% during the period since the start of the year. EWBC’s projected long-term earnings growth rate of 10% promises rewards for shareholders.

Western Alliance, based in Phoenix, AZ, offers a wide range of deposit, lending, cash management, international banking and online banking products and services. As of September 30, 2021, WAL had total assets of $ 48.3 billion, $ 34.6 billion in net loans held for investment and $ 45.3 million in total deposits.

Western Alliance has seen a steady improvement in its revenues. Over the past five years, revenue has registered a CAGR of 15.3%, with the upward trend continuing in the first three quarters of 2021. The increase in loan and deposit balances, efforts to strengthen fresh revenue sources and improving the economy will contribute to income in the next quarters.

The company has also grown through strategic acquisitions. In April, Western Alliance completed the previously announced takeover of Aris Mortgage Holding Company, LLC for total consideration of nearly $ 1.22 billion. The acquisition complements the company’s domestic business operations and expands its mortgage-related offerings. It also diversifies the composition of WAL’s income by broadening sources of non-interest income.

WAL’s capital deployment activities appear impressive. During the third quarter of 2021, the company increased its quarterly dividend from 40% to 35 cents per share. This was the first dividend increase for the company since it started paying the same amount from August 2019.

The stock, with a market cap of $ 11.2 billion, has jumped 79.4% so far this year. WAL’s projected long-term earnings growth rate of 26.7% promises rewards for shareholders.

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