A potential soft landing for the U.S. economy has sparked an upswing of interest in U.S. banking stocks, elucidated in a recent note to clients by Bank of America on Thursday.
The group of Bank of America’s equity analysts, spearheaded by Ebrahim H. Poonawala, has highlighted several influential factors likely to bolster a bullish trend in banking stocks. This optimism is rooted in the evolving economic landscape, anticipated policy shifts, and the strategic positioning of individual banks.
“We see potential for an overshoot in bank stocks,” the analysts conveyed in the note.
“Increasing confidence that interest rates headed lower, economy avoiding a recession, and GDP accelerating in the second half of the year should see a continued re-rating higher in stocks,” they added.
The market echoed this sentiment with a positive reaction to the note. The Financial Select Sector SPDR Fund XLF surged by 1% on Thursday, reaching highs not seen since late April 2022. Similarly, the SPDR S&P Regional Banking ETF KRE soared by 1%, marking a 35% increase since late October 2023.
U.S. Bank Stocks Surge To 20-Month Highs
Catalysts Driving the Bull Market for Bank Stocks in 2024
- Interest Rates and Economic Outlook: The anticipation of lower interest rates, coupled with a resilient job market and expected GDP growth in the latter half of 2024 and into 2025, are pivotal in driving investor confidence toward banking stocks.
- Federal Reserve’s Anticipated Moves: With Bank of America predicting the Fed to initiate rate cuts starting March, there is renewed optimism in the banking sector. Lower rates could spur activities in investment banking and mortgages, potentially offsetting the margin pressures brought about by the rate cuts.
- Focus on Net Interest Income and Margin: The sustainability of net interest income and the ability to defend margins are in place, regardless of the number of Fed rate cuts in the upcoming months.
- Attractive Valuations: U.S. banking stocks, particularly within the mega-cap bank group, are currently trading at a 50% price-to-earnings discount compared to the S&P 500, presenting a compelling risk/reward opportunity.
- Regional Banks in the Spotlight: The investment bank is notably bullish on regional banks, citing economic rebound as a key driver for their growth.
Top Bank Picks For 2024 by Bank of America
Bank of America’s top bank stock recommendations for 2024 include:
| Company | Rating | Upside | New PO |
|---|---|---|---|
| New York Community Bancorp, Inc. NYCB | Buy | 27% | $13.00 |
Bank of America has upgraded Truist Financial Corporation to Buy on a strong balance sheet, expense flexibility, capital optionality and a sharpened focus within management on “righting the ship.”
Other top picks among regional banks are:
- US Bancorp: The bank’s deal-driven synergies and its distinct payments business make it a favorable pick.
- KeyCorp: Expected to experience significant margin expansion and benefit from a rebound in investment banking.
- East West: Lower rates could mitigate perceived commercial real estate risks, shifting the focus to its above-average growth potential and top-tier ROA/ROTCE.
- Western Alliance: Seen as highly leveraged to benefit from rate cuts, especially in funding and mortgage areas.
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