5 Best Bank Stocks to Buy in December 2021

Bank stocks have outperformed in 2021 as the increase in interest rates and improving balance sheets helped propel the earnings from the 2020 lows. The US Federal Reserve has already increased the pace of tapering and would end the monthly bond buying in the first quarter of 2022.

Unless the economic conditions deteriorate significantly, the Fed looks on track to increase the interest rates sometime next year. The dot plot after the meeting earlier this month showed that the Fed anticipates three rate hikes in 2022. A rising rate environment is positive for banks.

Bank stocks might outperform

Banks generally borrow at the short end of the curve and lend at the long end. In a rising rate environment, banks make a higher margin as compared to what they make in a low interest rate environment. If the economic momentum sustains in 2022, bank stocks might continue to outperform. Here are the five best bank stocks that you can buy in December 2021.

1. Bank of America (NYSE: BAC)

Berkshire Hathaway chairman Warren Buffett has a flair for banking and financial stocks. Buffett has long strived to keep the conglomerate’s holdings in banks below 10% to escape regulatory scrutiny. He sold bank shares whenever the holding was getting near 10%. However, he made an exception for Bank of America and increased the stake beyond 10%. According to the most recent filings, Berkshire Hathaway is the largest BAC shareholder and holds a 12.3% stake in the company.  BAC is the second biggest holding for Berkshire Hathaway, just behind Apple.

JPMorgan finds BAC a good bank stock to buy

Warren Buffett is not alone in being bullish on BAC. Last week, JPMorgan Chase said that it finds BAC as a top bank stock to buy for 2022 as the Fed embarks on its rate hike program. “We continue to rate Bank of America Overweight relative to our universe, reflecting the benefit from its strong retail franchise, greater sensitivity to long and short term rates, ability to return capital, and lower credit risk,” said JPMorgan analyst Vivek Juneja in his note.

BAC has a dividend yield of 1.9% and has a strong balance sheet. The stock trades at an NTM (next 12 months) PE multiple of 13.8x and a price-to-book value multiple of 1.4x. It looks among the best bank stocks to buy for 2022 and would be among the biggest beneficiaries of the expected rise in interest rates.

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2. Wells Fargo (NYSE: WFC)

Wells Fargo looks like another good bank stock to buy for 2022. The stock has gained 55% for the year and is outperforming peers. The company was once a major holding for Berkshire Hathaway but Buffett has gradually sold shares. However, the stock has performed well and Jefferies believes that it could continue to do well in 2022 as well. The brokerage named Wells Fargo as a top pick for 2022 and said that the stock is a good bet irrespective of the Fed’s policy moves.

Jeffries sees WFC as a top bank stock for 2022

Wells Fargo seems to have put the controversies behind it. The stock trades at an NTM PE multiple of 12.8x and has a price-to-book multiple of 1.1x. It has a dividend yield of 1.67% which is above that of the S&P 500 even as it is below what some of the other banks offer. Wall Street analysts have a consensus buy rating on the stock and its median target price of $54.25 is a premium of 13.1% over current prices.

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3. Citigroup (NYSE: C)

Citigroup stock is trading flat for the year and is underperforming the markets as well as other bank stocks. However, if you are looking to buy a bank stock that is a turnaround candidate, Citigroup should be on your radar.

Citigroup reorganized its business earlier this year and said that it will exit consumer banking from 13 countries as part of a major overhaul. Together these markets made less than 5% of Citigroup’s 2020 revenues.

Commenting on the decision, Citigroup’s CEO Jane Fraser said, “While the other 13 markets have excellent businesses, we don’t have the scale we need to compete. We believe our capital, investment dollars and other resources are better deployed against higher returning opportunities in wealth management and our institutional businesses in Asia.”

Citi would fit the bill if you are looking for high dividend bank stock

Citi has a dividend yield of 3.4% which is higher than most of its peers. Wall Street analysts are also bullish on the stock and 16 of the 26 analysts covering it have a buy rating. The remaining 10 analysts have a hold rating. The stock has a median target price of $82 which is a premium of 37.4% over current prices.

The stock has an NTM PE of 7.4x while the price to book value multiple is 0.6x. The valuations look attractive at these prices.

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4. SoFi (NYSE: SOFI)

While thinking about bank stocks, SoFi might not come to mind. However, neobanks like SoFi are giving traditional banks a good fight and are snatching away their market share. Also, apart from being a fintech, SoFi is also a banking play as it is expected to get a bank charter. The stock has come off its highs and the crash looks like a good opportunity.

Citi is bullish on SoFi ahead of the bank charter

Citi has initiated coverage on SoFi stock with an overweight rating and said that it expects the stock to bounce back to $20. Notably, Citi has not factored in the bank charter which could lead to further upside in SoFi stock. “We like SoFi’s differentiated combination of consumer (lending, financial services) and enterprise (technology platform) services targeted at large markets on both sides with a member-centric approach and well-designed products that lead to rapid member growth and engagement (cross-buy),” said Citi in its note.

SoFi is a good fintech stock to buy ahead of the expected bank charter and the recent crash has made it even attractive.

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5. Invesco KBW Bank ETF (KBWB)

ETF investing has become very popular and total ETF assets are now over $7 trillion. ETFs can be a good investing strategy especially for investors who lack the time or analytical skills to pick individual stocks. Their low expense ratio makes them an attractive investment option. If you are looking to invest in an ETF that can give you diversified exposure to banks, KBWB looks like a good bet.

If seeks to invest at least 90% of the funds in the KBW Nasdaq Bank Index and has an annual expense ratio of 35 basis points. The portfolio has 25 stocks and Wells Fargo, PNC Financial Services, Bank of America, JPMorgan Chase, and Citigroup are its top five holdings.

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