What happened
Shares of three of the largest U.S. banks kicked off the new year on Wall Street in good form. Wells Fargo (WFC -1.11%) and Bank of America (BAC -1.07%) closed Monday's session up by nearly 5.7% and 3.8%, respectively, after bullish calls from Wall Street. Shares of Citigroup (C -1.09%) were 4.5% higher.
So what
Bank stocks generally edged up Monday as yields on longer-term Treasury bills are rising. That's helpful for lenders because many of their loan yields are tied to these rates. And the Federal Reserve is expected to raise its benchmark overnight loan interest rate as many as three times in 2022 (by 25 basis points each time), which will also benefit banks.
Wells Fargo outperformed the sector Monday after analysts at Barclays upgraded its stock from an equal rating to an outperform rating while increasing their price target on it to $62 a share, which implies roughly 24% upside from its current level. Barclays analyst Jason Goldberg also wrote in his research note that he expects Wells Fargo to benefit from "substantial progress on its regulatory issues, expense saving opportunities, and above-average excess capital."
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The views of Barclays' analysts also appeared to be lifting Bank of America. Barclay's named the stock as its top choice of all the money center banks for 2022. Those analysts are broadly bullish on bank stocks because their net interest margins -- essentially, the difference between what banks make on interest-earning assets such as loans and securities and what they pay out on interest-bearing liabilities such as deposits -- are expected to rebound in 2022 from the all-time lows they've hit in recent years.
Bank of America and Wells Fargo are some of the most asset-sensitive banks in the country, meaning a larger proportion of their assets than their liabilities reprices higher when the fed funds rate rises. At the end of the third quarter, Bank of America said that 1% parallel rises in short- and long-term interest rates would bolster its net interest income (its profits from loans and securities after it covers the cost of funding those assets) by $7.2 billion. Wells Fargo estimates that under those circumstances, its net interest income would increase by $7.4 billion.
There was no obvious news about Citigroup specifically Monday, but its stock trades at a steep discount -- just about 80% of its tangible book value (TBV), which is what it would be worth if it were liquidated. Investors got frustrated with Citigroup a few months ago when management surprised the market by announcing that they had paused share repurchases in the fourth quarter. But management also said they expect to resume stock buybacks in this quarter, so investors may be coming back to it based on that.
What now
In general, bank stocks can serve as a nice hedge against inflation, so I would expect them to perform well in 2022, and Wells Fargo and Bank of America are some of the most asset-sensitive institutions in the industry. If economic growth is strong and loan growth picks up a little bit, those two banks may even benefit more in a rising-rate environment.
Citigroup is not nearly as asset sensitive, but it remains at a depressed valuation. Considering the bank is expected to resume stock buybacks, offers a nice dividend yield at current share prices, and is in the midst of a transformation plan, I expect to see Citigroup stock make a decent recovery this year.
