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

By Bram Berkowitz – Updated Jan 12, 2022 at 6:19AM

Key Points

  • Bank of America and Wells Fargo are two large money center banks, and should benefit the most from a rising-rate environment.
  • Comerica and Citizens Financial Group are two bigger regional banks and have nice dividend yields.
  • Silvergate Capital will likely be more volatile than these other stocks, but it's also the most asset-sensitive.

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These banks will benefit a ton from rising interest rates.

After a sharp reversal in the final few months of 2021, the Federal Reserve looks poised to raise the federal funds rate -- the benchmark overnight borrowing rate -- multiple times this year. This should bode well for bank stocks, most of which will benefit in a rising-rate environment. With this 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 U.S., Bank of America (BAC -0.25%) is a popular pick among investors thinking about rising rates. As one of the largest commercial lenders, Bank of America is very asset-sensitive, meaning that when rates rise, the yields on more of its assets, like loans, reprice higher than those on its liabilities, like deposits. The bank disclosed after its last earnings report that a 1% parallel move in short- and long-term interest rates would result in $7.2 billion of additional net interest income (profits on loans and securities after covering the cost of funding those assets) over the next year. Loan growth should also continue to bounce back this year.

Bank of America is one of the largest banks in the country, it's not going anywhere, it does not have any big regulatory issues right now, and it has strong levels of capital, making it a very low-risk stock.

People meeting in conference room.

Image source: Getty Images.

2. Comerica

Comerica (CMA 2.25%) is a more-than-$91-billion-asset bank based in Dallas. With a loan book that is more than 88% commercial and a very low-cost deposit base, it is one of the most asset-sensitive banks in the industry. If the Fed were to raise its federal funds rate by 1%, Comerica would realize an additional $188 million of net interest income over the next year, which is equivalent to an 11% increase. Investors have taken notice, which is why Comerica is trading at a higher valuation these days -- but with some loan growth, or if the Fed raises the federal funds rate past 1% over the next few years, profits may come in even better than expected. The bank also has a nice 2.8% dividend yield at Wednesday's prices.

3. Wells Fargo

Despite its regulatory issues, Wells Fargo (WFC -0.74%) has a balance sheet that is primed to take advantage of the rising-rate environment. The bank has been hammered by low rates over the past two years. It has also suffered from an inability to really grow its balance sheet over the last several years due to the asset cap the Fed imposed as punishment for its phony-accounts scandal. A 1% move in interest rates would add another $7.4 billion of net interest income over the next year. Plus, when the bank eventually gets the asset cap removed, it will be able to grow loan balances much more strongly. 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 removal is certainly likely over the next few years.

4. Silvergate Capital

Silvergate Capital (SI -18.05%) is not a traditional bank, in that it really operates in the crypto space. It has built a real-world payments platform called the Silvergate Exchange Network (SEN), which allows institutional traders and cryptocurrency exchanges to trade and exchange funds better because it operates around the clock. SEN has drawn in more than 1,300 clients; the more that join, the more appealing the network is for others. Clients bring large amounts of non-interest-bearing deposits to the bank, which the bank doesn't pay any interest on. So Silvergate currently has billions of excess deposits, most of which it can make a profit on simply by investing in securities.

While Silvergate's stock price seems to be somewhat correlated with the price of Bitcoin, and volume on SEN is related to crypto spot trading volume, I would be remiss not to mention this stock because of how ridiculously asset-sensitive it is. At the end of the third quarter, Silvergate disclosed that a 1% move higher in the federal funds rate would boost net interest income by more than 52% over the next year.

5. Citizens Financial Group

The $187-billion-asset Citizens Financial Group (CFG 2.24%), based in Rhode Island, is another very asset-sensitive bank. A 1% move in the federal funds rate would grow its net interest income by nearly 11% as of the end of Q3. A 2% move would grow net interest income close to 21%. The bank has been valued at the low end of its peer group for several years now, but has improved its deposit base, put together a unique consumer lending strategy, and also moved to grow the bank nationally through its announced acquisitions of Investors Bancorp and 80 U.S. branches from HSBC. Additionally, the bank has bulked up other areas like investment banking. It has a 2.9% dividend yield.

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz owns Bitcoin and Silvergate Capital Corporation. The Motley Fool owns and recommends Bitcoin. The Motley Fool recommends HSBC Holdings and Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

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