After a continued period of rate hike delay, things seem to be finally taking shape as per hints dropped by Fed Chair Janet Yellen and several other officials. Yellen indicated that a rate hike is in the offing this month with more slated to follow later this year, reflecting renewed strength in the job market and a bump up in inflation.

This calls for investing in banks as such institutions will see increased profits with a hike in interest rate. Optimism surrounding President Donald Trump’s plans to slash taxes and relax regulations have already provided an impetus to bank stocks.

Yellen Hints at March Rate Hike

Yellen pointed out that the Fed will likely resume hiking rates at the U.S. central bank’s policy meeting to be held on Mar 14–15. In a speech to The Executive’s Club of Chicago, she said that the “Federal Open Market Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the Federal funds rate would likely be appropriate”. The language is similar to what Fed has used in the past to signal at an imminent rate hike. 

It’s a welcome move as she wanted to get rates off the ground throughout her three-year tenure. Also,  the gradual improvement in the economy, inflation rising toward the central bank’s 2% target and investors aligned around the idea of a rate hike prepare the grounds for a hike. She added that the Fed still has scope to raise rates at a gradual pace and has penciled in three hikes this year.

Based on some market measures, investors now see the odds of a March rate hike at 75%, up from 22% last week. Interest-rate futures, in the meantime, suggest that markets now expect the Fed to raise rates 2.5 times this year, moving closer to the Fed’s projections of three increases.

Fed Officials: March Rate Increase 'on the Table'

Fed officials, including some dovish members, also reiterated that a rate hike in the policy meeting in less than two weeks is likely. Notably, New York Fed President William Dudley said that the case for a March move had become “a lot more compelling”.

Vice Chairman Stanley Fischer said that “there is almost no economic indicator which has come in badly in the last three months”. He added that “if there has been a conscious effort” to boost expectations of a rate rise, I'm about to join it”.

San Francisco Fed President John Williams confirmed that “a rate hike increase is very much on the table for serious consideration” at this month’s meeting, while Fed Governor Lael Brainard joined the throng of Fed officials suggesting a rate hike will come “soon”.

Bank Stocks Rally on Rate Hike Expectations

Bank stocks gained on higher chances of an interest rate hike this month. Higher longer-term interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.

Financial stocks in the S&P 500 cohort rose 0.5% on Mar 3, most in the index. Shares of banking behemoths including Bank of America (BAC Quick QuoteBAC - Free Report) , Wells Fargo (WFC Quick QuoteWFC - Free Report) , Citigroup (C Quick QuoteC - Free Report) and JPMorgan Chase (JPM Quick QuoteJPM - Free Report) scaled 0.8%, 0.3%, 0.6% and 0.7%, respectively. In the last one-year period, all of these companies had registered double-digit growth.

5 Solid Choices

As the possibilities of a Fed rate hike increase with Yellen believing that the economy has essentially met the Fed’s mandate to achieve full employment and inflation is fast approaching the 2% mark, investing in bank stocks seems to be prudent.

We have, thus, selected five bank stocks that have a price to book (P/B) ratio less than the industry’s median P/B values. It essentially means that the stocks are trading at a discount to the industry. We have also considered P/B values that are not less than 1 or else it will indicate that the company is experiencing financial distress, bankruptcy or even low earnings power.

The P/B ratio is the ratio of the market value of equity to the book value of equity and is the single most used ratio while valuing full service banks. Additionally, we have selected stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Hancock Holding Company operates banking offices, automated teller machines in the states of Mississippi and Louisiana. The bank is community oriented and focuses primarily on offering commercial, consumer and mortgage loans and deposit services. Hancock Holding has a P/B ratio of 1.44, less than the industry’s median value of 1.49. Hancock Holding has a Zacks Rank #1.

The company’s estimated growth rate for this year is 36.9%, way higher than the industry’s return of 11.9%. Hancock Holding has outperformed the Banks - Southeast industry over the last one year (+84.8% vs. +55.4%).

Bank of America Corporation  provides banking and financial products and services for individual consumers, small and middle-market businesses. Bank of America has a P/B ratio of 1.05, less than the industry’s median value of 1.48. Bank of America has a Zacks Rank #2.

The company’s estimated growth rate for this year is 16.2%, higher than the industry’s gain of 10%. Bank of America has outperformed the Banks - Major Regional industry over the last one year (+89.3% vs. +44.8%).

Eagle Bancorp Montana, Inc. (EBMT Quick QuoteEBMT - Free Report) provides various retail banking products and services in Montana. The company has a P/B ratio of 1.23, less than the industry’s median value of 1.67. Eagle Bancorp Montana has a Zacks Rank #2.

The company’s estimated growth rate for this year is 9.8%, more than the industry’s increase of 5.1%. Eagle Bancorp Montana has outperformed the Banks - Midwest industry over the last one year (+57.2% vs. +42.5%).

Peoples Bancorp Inc. (PEBO Quick QuotePEBO - Free Report) provides a range of financial products and services. The company has a P/B ratio of 1.35, less than the industry’s median value of 1.67. Peoples Bancorp has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company’s estimated growth rate for this year is 7%, more than the industry’s addition of 5.1%. Peoples Bancorp has outperformed the Banks - Midwest industry over the last one year (+66% vs. +42.5%).

Valley National Bancorp (VLY Quick QuoteVLY - Free Report) provides commercial, retail, trust, and investment services. The company operates through Commercial Lending, Consumer Lending, and Investment Management segments. Valley National Bancorp has a P/B ratio of 1.44, less than the industry’s median value of 1.48. Valley National Bancorp has a Zacks Rank #2.

The company’s estimated growth rate for this year is 9.5%, more than the industry’s gain of 8.3%. Valley National Bancorp, which is part of the Banks - Northeast industry, has given a solid return of 29.7% in the last one-year period.

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