3 Bank Picks As Powell Soothes Market Concerns Over Taper Moves

Jerome Powell, the newly-renominated U.S. Federal Reserve chair, yesterday appeased the market's reaction over his previous comments on ending its asset purchases a few months early. He indicated that the Fed's bond-buying program's winding down will not cause havoc to the financial markets. The faster pace of tapering will position the Fed to raise interest rates in mid-2022 if higher inflation continues to prevail.

A higher interest rate will set a stage for recovery for banks. Hence, it might be prudent to invest in bank stocks with a favorable Zacks Rank. Here are such stocks — Southside Bancshares (NASDAQ:SBSI), Inc. SBSI, Hancock Whitney (NASDAQ:HWC) Corporation HWC and HomeStreet (NASDAQ:HMST), Inc. HMST.

Recent Developments Pointing at Faster-than-Expected Rate Hike

During the testimony to the Senate Banking Committee on Tuesday, Powell supported the discussion of a faster pace of tapering, citing a strong economy and high inflation pressures. He indicated that the notion might be up for discussion in the next Fed meeting on Dec 14- Dec 15.

Consequently, on Nov 30, the Dow and the Nasdaq Composite tumbled 1.9% and 1.6%, respectively. The 10-year U.S. Treasury Note yield also dropped to 1.44%.

Following this, yesterday, answering a question at a congressional hearing, Powell said, "I think that the taper need not be a disruptive event in markets, I don't expect that it will be. It hasn't been so far. We've telegraphed it."

Powell also repeatedly emphasized that it would be apt to pace up the tapering process so that it ends a few months earlier than expected June 2022.

Effective November, the Fed is tapering its $120-billion asset purchase program at a $15-billion per-month pace. This would bring the quantitative easing program to an end in June 2022. Consequently, the first rate hike was not expected before the second half of 2022. However, the recommended acceleration of tapering might allow the central bank to hike the rate faster than anticipated.

Going by the CME FedWatch Tool data, at present, there is a 71% probability that the Fed will move ahead with an interest-rate hike in June 2022.

Are Banks Out of the Woods?

Owing to the Federal Reserve's accommodative monetary policy stance and near-zero interest rates, banks have been witnessing pressure on net interest margin (NIM) since March 2020. Hence, the faster-than-expected rate hike comes as a breather for banks by lifting net interest income (NII), which accounts for a major part of the top line.

Also, excess liquidity, which had been hindering margins, will likely positively impact asset sensitivity for most banks in a rising rate environment due to the short-duration, high-beta nature of cash.

Our Top Picks

Given the upcoming tailwinds for banks, we have narrowed our search to three stocks that have seen positive earnings estimate revisions of at least 1% for 2022 in the last four weeks. Each of our picks has a Zacks Rank #1 (Strong Buy) or 2 (Buy), and a market cap of not less than $1 billion. Also, these stocks are trading at a discount when comparing the price-to-earnings or P/E (F1) ratio with the finance sector. Hence, it might be an opportune time to buy these stocks before valuations rise in anticipation of the potential rate hikes. You can see the complete list of today's Zacks #1 Rank stocks here.

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

Image Source: Zacks Investment Research

Southside Bancshares: Southside Bancshares is headquartered in Tyler, TX, with $7.14 billion in assets as of Sep 30, 2021. The company offers consumer and commercial loans, mortgages, deposit accounts, safe deposit boxes, treasury management, wealth management, trust services, brokerage services, and an array of online and mobile services through its 55 branches.

In the third quarter, Southside Bancshares' deposit and loan growth, net of Paycheck Protection Program loans, were 13.5% and 7.9%, sequentially. NIM of 2.96% increased from 2.83% year over year. Macro conditions in SBSI's markets (Dallas/Fort Worth and Austin areas) remain strong, enabling the company to see a healthy loan pipeline. Going forward, economic growth is expected to aid loan growth.

Since Southside Bancshares traditionally had a liability-sensitive balance sheet, management has taken appropriate steps to reduce the liability sensitivity in anticipation of a rate hike. In the third quarter, SBSI saw an increase in non-maturity deposits, low cost-interest bearing liabilities. Also, in the past year, SBSI has increased non-maturity deposits, facilitating a reduction in higher-cost funding avenues like time deposits and FHLB borrowings.

Southside Bancshares' 2021 earnings are expected to witness 34.1% year-over-year growth. The Zacks Consensus Estimate for 2022 improved 32% over the last 30 days. Southside Bancshares has a P/E F1 ratio of 9.53, lower than the finance sector's 13.98. This Zacks Rank #1 company has a market cap of $1.32 billion.

Hancock Whitney: Gulfport, MS-based Hancock Whitney offers banking operations and services, including a variety of transaction and savings deposit products, commercial and small business banking, private banking, trust and investment services, healthcare banking, mortgage banking, and certain insurance services. HWC remains focused on its revenue growth strategy. Its strategic investments in growth and new markets are expected to bolster the top line and help achieve an efficiency ratio of 55% by the end of fourth-quarter 2022.

Hancock Whitney's revenues (on a tax-equivalent basis) witnessed a compound annual growth rate (CAGR) of 7.9% over the last six years (2015-2020), with the momentum continuing in the first nine months of 2021. Going forward, robust economic growth and a gradual rise in demand for loans will support the top line.

Capital deployment activities are also encouraging. Hancock Whitney had 4.1 million shares remaining under the authorization as Sep 30, 2021, which is set to expire on Dec 31, 2022. Given a decent liquidity position and earnings strength, the company is expected to sustain efficient capital deployments.

Hancock Whitney has an expected earnings growth rate of a whopping 760% for the current year. The Zacks Consensus Estimate for HWC's 2022 earnings improved 2.3% over the last 30 days. Hancock Whitney has a P/E F1 ratio of 9.53, lower than the finance sector's 15.57. This Zacks Rank #2 company has a market cap of $4.1 billion.

HomeStreet: HomeStreet is a diversified commercial and consumer bank headquartered in Seattle, WA, with $7.4 billion in assets as of Sep 30, 2021. HomeStreet has made significant strides to transform itself into a full-scale commercial bank by expanding its market presence in highly attractive metropolitan markets.

Also, the company sold a major chunk of its mortgage business in 2019. Such an evolving business model has helped HMST reduce earnings volatility, given the choppiness in the mortgage market. HomeStreet's contribution of revenues from single-family mortgage banking reduced from 26% in third-quarter 2020 to 17% in third-quarter 2021. Given the expectation of a slight decline in origination and gain on sale activities, revenues from mortgage are expected to be an even smaller share of HomeStreet's revenues, going forward.

In third-quarter 2021, the company's NII and NIM were relatively stable at $57.5 million and 3.42%, respectively. HMST also has a highly diversified loan portfolio in terms of product and geography. Management expects 10-15% of loan growth in 2022 and, thereafter, primarily driven by higher commercial real estate loan originations. This also corresponds to an increase in NII, which is likely to drive top-line growth.

HomeStreet's 2021 earnings are expected to witness 52.7% year-over-year growth. The Zacks Consensus Estimate for 2022 improved 2.7% over the last 30 days. HomeStreet has a P/E F1 ratio of 9.53, lower than the finance sector's 10.54, which seems unjustified, given the low earnings volatility. This Zacks Rank #2 company has a market cap of $1.01 billion.

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