Wells Fargo's top banking analyst Mayo gives his favorite stocks for 2022

Published Tue, Jan 4 202212:02 PM ESTUpdated Tue, Jan 4 20222:49 PM EST

Financial stocks are off to a strong start in 2022, and Wells Fargo Equity Research believes the sector has room to run this year. The SPDR S & P Bank and Regional Banking exchange-traded funds are both up more than 5% this week, as of midday Tuesday. "Financials should benefit from changes in interest rates, still good credit, efficiencies from the tech revolution, still attractive valuations, and Covid recovery," top bank analyst Mike Mayo said in a note Tuesday. The benchmark 10-year Treasury yield rose from Friday's 1.51% to as high as 1.642% Monday in the biggest move for the first day of trading since 2001 . The move higher comes as the Federal Reserve prepares to end its pandemic-era bond-buying program and hike interest rates, potentially by March . Rising interest rates benefit banks in several ways. For instance, the cost of borrowing will go up for consumers in the form of higher rates on credit cards and certain mortgages. In turn, this boosts banks' profitability. "Bank stocks seem to just move in tandem with interest rates," analyst Jared Shaw said in the note. Plus, banks are still benefiting from economic conditions from the Covid-19 pandemic, the analysts say. Credit costs have been at decadeslong lows as government aid and stimulus programs appeared to prevent defaults during the pandemic. As such, banks have "record dry powder" — meaning cash reserves — which should lead to "the fastest growth in a generation" for traditional banking revenue, Mayo said. Technological innovation in the financial sector should also improve efficiency, even as labor costs rise with wage inflation, according to Mayo. Below are the stocks Wells Fargo believes will outperform in the financial sector: Bank of America is Mayo's top pick among the large-cap banks. The stock is up roughly 8% this week. Mayo's $60 price target is about 30% higher than the company's closing price Monday. "BAC benefits from a period of higher rates and loan growth — it is the most sensitive of the largest banks, in our view," Mayo said in an October note. Signature Bank is Shaw's favorite stock among the mid-cap banks. The analyst gave the bank a price target of $400, which represents 22.2% potential upside from the stock's Monday close. The New York-based bank was among the top performers in the S & P 500 in 2021. Signature has made a name providing banking services for some of the largest institutional players in cryptocurrencies . "Our top pick for 2022 is once again SBNY, which we don't believe gets full credit for both its true asset sensitivity and its growth engine, which is as good as any and better than most other banks," Shaw said. Among consumer finance stocks, analyst Don Fandetti likes American Express . Fandetti said the company "has unfinished business in our view, given the headwind from delta/omicron," even as pandemic-driven stimulus continues to fade for consumers. "Investors fear that normalizing credit trends, while still very strong, could weigh on the stock performance for consumer lenders. While we agree this would be a headwind, we also point out that the consumer lenders should also benefit from rising rates if the Fed begins to tighten," Fandetti said. Wells Fargo also highlighted insurance stock Chubb and asset management firm Apollo as top ideas for 2022. —CNBC's Michael Bloom contributed reporting.

A Bank of America branch in San Francisco on Jan. 14, 2021.

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Financial stocks are off to a strong start in 2022, and Wells Fargo Equity Research believes the sector has room to run this year.