Top Bank Stock Picks For 2024: 'Valuations Are At 50% Discount To S&P 500,' Analysts Say

The possibility of a soft landing for the U.S. economy is gaining traction, prompting an increased interest in U.S. banking stocks, as Bank of America revealed in a note to clients on Thursday.

The group of Bank of America’s equity analysts, led by Ebrahim H. Poonawala, point out several key factors that might fuel a bullish trend in banking stocks this year. This optimism is rooted in the changing economic landscape, expected policy shifts and the strategic positioning of individual banks.

“We see potential for an overshoot in bank stocks,” analysts wrote 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 reaction was positive following the note. The Financial Select Sector SPDR Fund (NYSE:XLF) increased by 1% on Thursday, reaching highs not seen since late April 2022. Similarly, the SPDR S&P Regional Banking ETF (NYSE:KRE) rallied by 1%, and rose 35% since late October 2023.

Chart: US Bank Stocks Jump To 20-Month Highs

Key Factors Potentially Leading To Bank Stocks’ Bull Market In 2024

1. 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.
2. 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.
3. 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.
4. Attractive Valuations: Notably, 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.
5. Regional Banks in the Spotlight: The investment bank is notably bullish on regional banks, citing economic rebound as a key driver for their growth.

Bank of America’s Top Bank Picks For 2024

Bank stocks with the highest upside potential in 2024 according to Bank of America are:

Bank of America has upgraded Truist Financial Corporation to Buy on a strong balance sheet, expense flexibility, capital optionality and above all 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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