Regional bank stocks have been on a tear since the 2024 U.S. election, with the SPDR S&P Regional Banking ETF (NYSE:KRE) climbing about 10% versus the broader S&P 500’s 5% gain.

Despite this already strong outperformance, JPMorgan analysts, led by Anthony Elian, CFA, see more upside.

The key drivers? A potential Trump administration's pro-business stance, easing regulation and a favorable interest rate backdrop.

In a note shared with clients on Tuesday, Elian indicated that investors — long on the sidelines due to frustrations such as regulation, rising deposit costs and the Spring 2023 banking turmoil — are beginning to show renewed interest in the sector.

“Our optimism for the group is not only driven by the likelihood of improving fundamentals next year in areas such as loan growth, deposit growth, and NIM expansion, but also tied to the fact that dozens of generalists and long only investors that we have spoken to since the election are showing increasing interest in the group but have not yet pulled the buy trigger en masse,” Elian said.

In essence, analysts at the U.S. largest investment bank are bullish on regional banks heading into 2025, with a strong case for 20% upside.

Here's where they'd put $1,000 to work.

Why 2025 Could Be A Breakout Year For Regionals

According to JPMorgan, key catalysts driving stock gains across the industry next year include:

• A revival in loan growth spurred by onshoring trends.
• A deregulatory push from the upcoming Donald Trump‘s administration, particularly if Basel III Endgame proposals are halted.
• Improved M&A activity, with banks like Comerica Inc. (NYSE:CMA), First Horizon Corp. (NYSE:FHN), and Zions Bancorporation (NASDAQ:ZION) potentially benefiting.
• Lower corporate taxes supporting bottom-line profitability.
• A steep yield curve and the Fed's expected rate cuts in 2025, which could reduce deposit costs and boost Net Interest Margins (NIM).

Rate Cuts, Deposit Costs: A Big Win For Banks

JPMorgan highlights that deposit costs, which are tied to the Fed funds rate, remain critical to bank profitability.

As of the third quarter of 2024, the median cost of interest-bearing deposits stood at 3.5%, with higher-paying banks like Texas Capital Bancshares Inc. (NASDAQ:TCBI), Flagstar Financial Inc. (NYSE:FLG) and Valley National Bancorp (NASDAQ:VLY) above 4%.

Banks paying higher rates have the most room to benefit as the Fed eases monetary policy in 2025.

Lower-beta deposits, like those at First Hawaiian Inc. (NASDAQ:FHB) and Webster Financial Corp. (NYSE:WBS), offer less flexibility for adjustments.

JPMorgan's $1,000 Allocation Strategy

For retail investors looking to capitalize on regional bank momentum, JPMorgan provides a clear allocation breakdown:

Top Picks For 2025

JPMorgan highlights Western Alliance Corp, First Citizens BancShares and Pinnacle Financial Partners Inc. its top picks for regional banks in 2025, citing their relative strength in loan growth, cost efficiency and positioning for upside.

JPMorgan also rates Synovus Financial Corp., Webster Financial Corp. and Valley National Bancorp at Overweight, pointing to solid fundamentals and opportunities for growth.

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The images used was created using artificial intelligence MidJourney.