According to the U.S. Federal Reserve, interest rates are most likely to rise in 2022 following a tapering period in which asset purchases were reduced earlier in the year.

Investors who are more value-based tend to have a longer period of stock rotation when interest rates rise. Higher interest rates can cause uncertainty regarding future cash flows in growth stocks. This means investors will turn to dividend-paying stocks that are more value-oriented.

The banking sector is the most resilient sector during periods of rising interest rates. This is due to the fact that banks have higher profit margins and charge more loan premiums. Retrospective GDP growth leads to stronger economies, which in turn causes rates to increase.

Goldman Sachs (NYSE) is my favorite stock. Citigroup NYSE:) Stocks These are also some of my favorite picks for the banking sector.

Goldman Sachs

Goldman Sachs beat revenue estimates in its second quarter with record revenue from Investment Banking, and retracement in M&A, Advisory, and Corporate Lending units.

Goldman had a net interest income in the range of $1.63 Billion in Q1 and $1.48 Billion in Q2 2020. Investment Banking saw its income increase by 36%, while Asset Management revenues ($5.13Billion) increased more than twice as much from one year ago.

If we look at the PE ratio (6.9) out of isolation by incorporating its PEG (0.4), it’s valid to conclude that the company’s growth rate is still outpacing the stock price.

Goldman also increased its quarterly dividend to 60% recently. Investors may favor consistent dividend growth in an environment with higher interest rates. This could lead to a rise in stock prices.

Wall Street analysts consider Goldman a Moderate Buy, with an average price target of $433.18 over the next twelve months. The stock has received eight Buy ratings and two Hold ratings. One Sell rating was also given.

Citigroup

Citi stock is one that investors have grown optimistic about ever since Jane Fraser became the new CEO of the company in February.

Fraser is expected to focus on Asset Management while severing other profitable areas like Consumer Banking in Mexico.

Citi’s revenue growth was a slowdown in the last five years. However, Q2 results from the bank showed signs of an efficient business. Total revenue declined by $2.3 billion, but the net income increased by $5.1 billion, a 486.5% year-over-year increase.

Citigroup’s cost of capital has fallen by 57%, since 2020. Based on this trajectory it could fall to 5.2%. Citi’s equity/debt ratio has fallen by 56% in November 2020. This combined with the decrease in capital costs has led to an increase in fair value for investors.

Wall Street analysts believe Citi is a solid buy. Seven analysts have given Citi Buy ratings, while none of them gave Citi Hold or Sell ratings. Citigroup’s average price target of $88.71 implies a 26.4% upside possibility.

Conclusion Thoughts

Both these stocks trade at a discount. Citigroup is a play based on asset price metrics, while Goldman is a pure value investment.

Higher yields will be a boon for these stocks.

Disclosure: Steve Gray Booyens was a long-standing employee of GS at the time this article was published.

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