The Fed Will Raise Rates Until Inflation Comes Down: 3 Banks to Watch – May 18, 2022

Federal Reserve Chairman Jerome Powell has indicated that the central bank will continue to raise interest rates until inflation is brought under control. At a Wall Street Journal event yesterday, he promised the Fed would keep pushing and could raise rates as high as needed to curb soaring inflation.

He said: “What we need to see is that inflation is coming down in a clear and convincing way and we are going to keep pushing until we see it. If we don’t see that, we’ll have to consider acting more aggressively. Achieving price stability, restoring price stability, is an unconditional need. It really is the foundation of the economy.

Given that banking stocks are clear winners in a rising rate environment, today we are discussing three banking stocks with strong prospects – SVB Financial (SIVB free report), Prosperity Bancshares, Inc. (BP free report) and Hancock Whitney Society (HWC free report).

To combat runaway inflation, the Fed has already hiked interest rates by 25 basis points (bps) in March and 50 bps this month (the biggest move in more than two decades), after whereupon short-term interest rates are now hovering at 0.75-1.00%. When raising rates by 50 basis points, the central bank ruled out the possibility of a larger hike. At the time, Powell said a 75 basis point hike is “not something the committee is actively considering” and hinted at the possibility of further hikes of 50 basis points each during the two next meetings in June and July.

While delivering his most hawkish remarks to date, Powell yesterday acknowledged the pain such a move could cause the economy in terms of slowing economic growth or rising unemployment. Therefore, Powell said there would likely be “pathways” for the pace of rate hikes to dampen inflationary pressures without a real recession. But, if inflation does not fall as expected, the Fed will not hesitate to raise its rates.

Powell added: “If it means going beyond the widely understood levels of ‘neutral’, we won’t hesitate to do so. We will go until we feel we are at a place where we can say “yes, financial conditions are in an appropriate place, we see inflation coming down”.

In addition to being keenly alert to inflation risks, Fed officials are taking note of geopolitical concerns stemming from the ongoing Russian-Ukrainian war and supply chain disruptions from COVID-related lockdowns in China.

Banks to watch

The three shortlisted banks should not only benefit from higher rates, but also have strong fundamentals. Along with expectations of higher rates, a continued increase in loan demand, decent economic growth and efforts to diversify the business will likely contribute to bank revenue growth.

Banks, which have seen their margins deteriorate since the onset of the pandemic in mid-March 2020 due to near-zero interest rates, will likely see improved net interest margins (NIMs) as well as revenues. net of interest (NII).

The shortlisted banks have a market capitalization of over $2 billion and currently carry a Zacks rank of #3 (Hold). These banks are expected to see earnings growth in 2022 as well as 2023. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SVB Financial has a market cap of $25.4 billion. It remains focused on its organic growth strategy, as evidenced by a steady increase in loans, deposits and NII over the past few years. The company’s net lending recorded a CAGR of 41.6% over the past three years (2019-2021). NII and deposits registered a CAGR of 23.1% and 28.5%, respectively, during the same period. In addition, improving non-interest income will likely continue to support top line growth.

For 2022, management expects average loans to increase in the mid-30s and average deposit balances to increase to 40s lows. The NII is expected to grow in the 50s, while the NIM is expected to be 2.10 at 2.22%.

SVB Financial is growing through strategic acquisitions, which will continue to support its position as one of the leading providers of innovative corporate finance solutions. In its effort to expand into tech investment banking, it acquired tech equity research firm, MoffettNathanson, in December 2021. In July, it acquired Boston Private, which is expected to further bolster its private banking offerings. and wealth management.

SIVB has also undertaken efforts to expand globally. While its operations in the UK and Asia appear to be expanding, businesses in Canada and Germany are expected to further increase revenue. Its international base commission revenue (reflecting operations in the UK, Europe, Israel, Asia and Canada) recorded a five-year CAGR of 34% (end 2021).

For 2022, the company’s earnings are expected to grow 5.9% year-over-year. For 2023, earnings are expected to increase by 32.1%.

Bancshares Prosperity, with a market capitalization of $6.2 billion and 272 full-service banking centers, offers a wide range of financial products and services – traditional loan and deposit products – to small and medium-sized businesses and consumers. The company also provides digital banking solutions, credit and debit cards, mortgage services, retail brokerage, trust and wealth management and cash management services.

Driven by strong loan balances and efforts to improve fee income, PB’s net revenue recorded a five-year CAGR of 11.5% between 2017 and 2021. The company was also able to improve its composition of deposits. As of March 31, 2022, 34.7% of total deposits were non-interest bearing deposits. Driven by strong loan demand, a solid deposit mix and rising fee income, the company’s revenue growth is expected to continue in the coming quarters.

Acquisitions remain another major contributor to Prosperity Bancshares revenue growth. Over the years, the company has expanded its business significantly through the acquisition of community banks and branches of other banks. Since 1998, she has carried out more than 30 transactions.

For 2022 and 2023, the company’s earnings are expected to grow 0.4% and 6.9%, respectively, year-over-year. Supported by a strong capital position, PB’s capital deployment activities remain impressive. It has increased its dividend every year since 1999, with the last increase announced in October 2021. Additionally, in January 2022, it announced a share buyback program (expiring January 18, 2023) to buy back up to 4, 6 million shares.

Hancock Whitney operates through 177 full-service bank branches and 240 ATMs in Mississippi, Alabama, Louisiana, Florida and Texas. With a market cap of $4 billion, the company 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. Robust economic growth and increased demand for loans will likely continue to support turnover.

The company’s strategic investments in growth and new markets should also strengthen its revenue and help achieve an efficiency ratio of 55% by the end of the fourth quarter of 2022.

For 2022, management expects total base lending (excluding Paycheck Protection Program lending) to grow 6-8% year-over-year, with quarterly performance impacted by seasonality. Total deposits are expected to be stable or slightly down from 2021 levels. The NIM is expected to widen due to expected future rate hikes.

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.

For 2022, HWC earnings are expected to grow 1.3% year-over-year. For 2023, earnings are expected to increase by 1.7%.

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