Top 5 Bank Stocks as Fed May Hike Rate Sooner Than Expected

·6 min read

On Nov 24, the Fed released the minutes of its FOMC meeting held in November. The minutes revealed that Fed members unanimously showed deep concerns about skyrocketing inflation. They also expressed their desire to speed up the tapering of the quantitative easing program and hike interest rate sooner-than-expected if inflation continues to rise in the near term.

A higher interest rate will benfit the financial sector, especially for banks. At this stage, it will be prudent to invest in bank stocks with a favorable Zacks Rank. Here are five such stocks — BOK Financial Corp. BOKF, Southern First Bancshares. SFST, Central Pacific Financial Corp. CPF, CrossFirst Bankshares Inc. CFB and Popular Inc. BPOP.

Fed May Take Tough Stand

Minutes of the Fed’s latest FOMC meeting indicated that the central bank would not hesitate to take a tough stand and deviate from its ongoing ultra-dovish monetary policies unless inflation shows signs of a decline.

On Nov 3, Powell said in his post-FOMC meeting statement that the Fed would start reducing its existing $120 billion per month bond-buy program ($80 billion Treasury Note and $40 billion mortgage-backed securities) effective this month.
The Fed decided to reduce its existing bond-buy program by $15 billion ($10 billion Treasury Note and $5 billion mortgage-backed securities) per month. At this rate, the quantitative easing program will terminate in June 2022. Consequently, the first rate hike is not expected before the second half of 2022.

However, after the release of the FOMC minutes, a large section of economists and financial researchers believe that the central bank may discuss and decide to speed up the pace of tapering to raise the benchmark interest rate in the first half of next year in its next FOMC meeting from Dec 14-15.

The personal consumption expenditure (PCE) price index for the month of October came in at 5%, marking the fastest gain since November 1990. The core PCE price index (excluding volatile food and energy items) — Fed’s favorite gauge of inflation — climbed 4.1% year over year in October, its highest since January 1991. The consumer price index (CPI) — popularly known as household inflation — jumped 6.2% year over year in October, marking its highest monthly rise in 31 years.

The CME FedWatch currently shows that market participants are expecting three rate hikes in 2022 each with a magnitude of a quarter basis points. Notably, the Fed is maintaining the benchmark lending rate in the range of 0-0.25%, which it set in March 2020 at the advent of the global outbreak of coronavirus.

Banks Likely to Benefit

A hike in interest rate will raise the cost of funds, which would enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting profits margins.

Banks have been witnessing a contraction in net interest margins (an important barometer to gauge banks’ financial performance) owing to near-zero rates. This is also hurting their top-line growth.

Consequently, as the Fed starts raising interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Despite the diversification of revenue streams, banks earn a major portion of their revenues from interest income.

Our Top Picks

We have narrowed our search to five regional banking stocks that have provided double-digit returns in the past three months. These stocks have strong upside left for the rest of 2021 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

BOK Financial Corp. operates as the financial holding company for BOKF, NA that provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. BOKF operates through three segments: Commercial Banking, Consumer Banking, and Wealth Management.

BOK Financial has an expected earnings growth rate of 44.9% for the current year. The Zacks Consensus Estimate for the current year has improved 3% over the last 30 days. The stock price of BOKF has jumped 28.5% in the past three months.

Popular Inc. provides various retail, mortgage, and commercial banking products and services in Puerto Rico and the United States. BPOP provides savings, NOW, money market, and other interest-bearing demand accounts; non-interest-bearing demand deposits; and certificates of deposit.

BPOP has an expected earnings growth rate of 87.9% for the current year. The Zacks Consensus Estimate for the current year has improved 9.3% over the last 60 days. The stock price of Popular has advanced 13.3% in the past three months.

Southern First Bancshares Inc. operates as the bank holding company for Southern First Bank that provides various banking products and services to the general public in South Carolina, North Carolina, and Georgia. SFST accepts various deposit products including checking accounts, commercial checking accounts, savings accounts, and other time deposits.

Southern First Bancshares has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 13.3% over the last 30 days. The stock price of SFST has jumped 28.5% in the past three months.

CrossFirst Bankshares Inc. as the bank holding company for CrossFirst Bank that provides various banking and financial services to businesses, business owners, professionals, and its personal networks. CFB provides personal banking, savings accounts, wealth management, loans, leasing, retirement plans, investment management and insurance services to businesses.

CrossFirst Bancshares has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 12.5% over the last 60 days. The stock price of CFB has appreciated 14.4% in the past three months.

Central Pacific Financial Corp. operates as the holding company for Central Pacific Bank that provides commercial banking products and services to businesses, professionals, and individuals in the United States. CPF operates through three segments: Banking Operations, Treasury, and All Others.

Central Pacific Financial has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 8.9% over the last 30 days. The stock price of CPF has surged 12.9% in the past three months.


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BOK Financial Corporation (BOKF) : Free Stock Analysis Report

Popular, Inc. (BPOP) : Free Stock Analysis Report

CPB Inc. (CPF) : Free Stock Analysis Report

Southern First Bancshares, Inc. (SFST) : Free Stock Analysis Report

CrossFirst Bankshares, Inc. (CFB) : Free Stock Analysis Report

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