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5 of the Smartest Bank Stocks to Buy in the Rising Rate Environment

5 of the Smartest Bank Stocks to Buy in the Rising Rate Environment
Written by publisher team

After a sharp reversal in the last few months of 2021, the Federal Reserve appears ready to raise the federal funds rate – the benchmark borrowing rate – several times this year. This would bode well for bank stocks, most of which would benefit in a price environment. With that in mind, here are five of the smartest bank stocks to buy in 2022.

1. Bank of America

The second largest bank by assets in the United States, American bank (NYSE: BAC) It is a popular choice among investors who are considering higher prices. As one of the largest commercial lenders, Bank of America is very sensitive to assets, which means that when interest rates rise, the returns on more of its assets, such as loans, re-priced higher than those on its liabilities, such as deposits. The bank revealed after its latest earnings report that the parallel 1% move in short- and long-term interest rates would result in $7.2 billion in additional net interest income (profits on loans and securities after covering the cost of financing those assets) over the next year. And loan growth should continue to recover this year.

Bank of America is one of the largest banks in the country, it’s not going anywhere, it doesn’t have any major regulatory issues right now, and it has solid levels of capital, making it a very low-risk stock.

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2. Comerica

comerica (NYSE: CMA) It is a Dallas-based bank with over $91 billion in assets. With a loan book of over 88% commercial and a very low cost deposit base, the bank is one of the most asset sensitive banks in the industry. If the Fed raises the Fed rate by 1%, Comerica will generate an additional $188 million in net interest income over the next year, which equates to an 11% increase. Investors have taken note, which is why Comerica is trading at a premium these days — but with some loan growth, or if the Federal Reserve raises the federal funds rate above 1% over the next few years, earnings may come in better than expected. The bank also has a decent dividend yield of 2.8% at Wednesday prices.

3. Wells Fargo

Despite the regulatory issues, Wells Fargo (NYSE: WFC) It has a balance sheet prepared to take advantage of a high interest rate environment. The bank has been hit by low interest rates over the past two years. It has also struggled with the inability to truly grow its balance sheet over the past several years due to the asset cap imposed by the Federal Reserve as punishment for its fake accounts scandal. A 1% move in interest rates would add another $7.4 billion in net interest income over the next year. In addition, when the bank eventually removes the asset ceiling, it will be able to grow the loan balances more aggressively. I don’t know if the asset cap will be removed this year, but it’s already been in place for nearly four years now, so a removal is definitely likely over the next few years.

4. Silvergate Capital

Silvergate Capital (NYSE: SI) Not a traditional bank, in that it really does work in the crypto space. It has built a real-world payments platform called Silvergate Exchange Network (SEN), which allows institutional traders and cryptocurrency exchanges to trade and exchange money better because it works around the clock. SEN has attracted more than 1,300 clients; The more subscribers, the more attractive the network to others. Customers bring large amounts of interest-free deposits to the bank, on which the bank pays no interest. So, Silverjet currently has billions of excess deposits, most of which can make a profit simply by investing in securities.

While Silvergate’s stock price appears to be somewhat correlated with that of Bitcoin, and volume on the SEN correlates with crypto trading volume, I would be remiss if I didn’t mention this stock because of how ridiculously sensitive it is to assets. At the end of the third quarter, Silvergate revealed that a 1% increase in the fed funds rate would boost net interest income by more than 52% over the next year.

5. Citizens Financial Group

Assets totaling $187 billion Citizens Financial Group (NYSE: CFG), headquartered in Rhode Island, is another very asset-sensitive bank. A 1% move in the fed funds rate would increase net interest income by about 11% by the end of the third quarter. A move of 2% would increase net interest income close to 21%. The bank has been valued at the lower end of its peer group for several years now, but it has improved its deposit base, developed a unique strategy for consumer lending, and also moved to grow the bank nationwide through announced acquisitions of Bancorp Investors and 80 US branches of HSBC. In addition, the bank has bundled other areas such as investment banking. It has a dividend yield of 2.9%.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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