The US banking industry, having experienced stability after setbacks in March and April 2023, is anticipated to perform well in 2024, according to S&P Global. While challenges like potential deposit declines, funding cost pressures, unrealized losses, commercial real estate exposures, and economic uncertainty persist, banks are expected to build capital. Regulatory changes proposed last year in terms of capital and resolution requirements may be finalized in 2024. The Federal Reserve's decision to maintain rates initially before considering cuts in mid-2024 is expected to result in a modest decline in deposits and incremental rises in funding costs in the first half of the year. Despite a dip in profitability, banks are projected to maintain good financial health, generating a return on common equity of 10%-11% and building capital through earnings retention. Although net interest income may decrease, asset quality pressure is anticipated to rise but remain manageable, given banks' pre-provision earnings positioning them well to absorb potential credit losses.
Around June 2024, banks are expected to adopt a cautious approach as the presidential election unfolds, potentially introducing new policies and regulations. With elevated interest rates and low stock prices, there is an increase in fund and deposit costs, putting pressure on bank earnings. The M&A market has significantly slowed down, but there are factors such as deposit flight, net interest margin growth, digital transformation, new product introductions, and geographic expansion plans that could fuel robust M&A activity. If an interest rate cut occurs in the 1st or 2nd quarter of 2024 and gains regulatory approval, the industry may witness a surge in M&A activity, as perKPMG.
The IMF anticipates a decline in global inflation to 5.2% in 2024, down from its peak of 8.7% in 2022. Despite signs of deceleration in the labor market and consumer spending in countries like the United States, inflation is predicted to remain above target rates globally. Central banks worldwide are expected to fine-tune their monetary policies in 2024. In the US, the federal funds rate is projected to stay elevated, potentially dropping in the second half of the year. The European Central Bank is expected to begin reducing interest rates, while the Bank of England and the Bank of Canada are expected to lower policy rates. The Bank of Japan, maintaining a near-zero policy rate, plans adjustments to its bond yield curve control schemes. However, overall, central banks' quantitative tightening measures are set to contract the global money supply, with the United States experiencing a notable decline in money supply, reminiscent of the 1930s.
Moreover, digital transformation remains a key focus for the banking sector, with ongoing investments directed towards enhancing customer service and updating technology platforms. In 2024, banks will persist in their efforts to make products digitally accessible and user-friendly, aiming to retain existing customers and attract new ones. Generative AI is gradually finding its place in banking, contributing to activities such as loan underwriting, risk forecasting, and providing personalized recommendations in customer service. According to IBM, in the realm of generative AI adoption among banking organizations, a substantial 86% are either in production or gearing up for implementation. Notably, 8% are employing a systematic approach, encompassing domains like client engagement, risk and compliance, information technology, and support functions. The majority, constituting 60%, primarily operate in advanced and emerging economies. Conversely, 14% of organizations currently have no immediate plans to engage with generative AI. Among the 78% of organizations taking a tactical approach, there is a focus on a limited number of use cases or domains, with a notable emphasis on risk and compliance and client engagement.
Some of the best banking stocks favored by elite hedge funds include JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), and Citigroup Inc. (NYSE:C). However, we discuss the most undervalued stocks in the banking sector in this article.
Our Methodology
For this article, we used a stock screener and shortlisted the most undervalued stocks in the banking sector by their PE ratios, which were under 15. The most undervalued stocks according to analysts were chosen by considering their upside potential, relying on analyst price targets as of March 4. Price targets were taken from Yahoo Finance. We have also assessed the hedge fund sentiment from Insider Monkey’s database of 933 elite hedge funds tracked as of the end of the fourth quarter of 2023. The list is arranged in ascending order of the number of hedge fund holders in each firm. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here).
12 Most Undervalued Bank Stocks To Buy According To Analysts
A city skyline with multiple regional banks in the foreground.
Most Undervalued Bank Stocks To Buy According To Analysts
KB Financial Group Inc. (NYSE:KB) is a South Korean financial institution that provides a wide range of banking and financial services worldwide. The company operates through Retail Banking, Corporate Banking, Other Banking, Credit Card, Securities, Life Insurance, and Non-Life Insurance segments. It is one of the most undervalued stocks to monitor. On February 7, KB Financial Group Inc. (NYSE:KB) reported a net profit of WON 4,631.9 billion and a revenue of WON 12141.7 billion for full-year 2023.
According to Insider Monkey’s fourth quarter database, 15 hedge funds were bullish on KB Financial Group Inc. (NYSE:KB), compared to 12 funds in the last quarter. William B. Gray’s Orbis Investment Management is the leading stakeholder of the company, with 850,086 shares worth over $35 million.
Like JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), and Citigroup Inc. (NYSE:C), KB Financial Group Inc. (NYSE:KB) is one of the best banking stocks.
11. The Bank of N.T. Butterfield & Son Limited (NYSE:NTB)
Number of Hedge Fund Holders: 16
PE Ratio as of March 4: 6.55
Average Upside Potential: 17.25%
Average Analyst Price Target: $35.20
The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) ranks 11th on our list of the most undervalued stocks in the banking space. The company provides a diverse range of community, commercial, and private banking services to individuals and small to medium-sized businesses. On February 13, The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) declared a $0.44 per share quarterly dividend, in line with previous. The dividend is payable on March 11, to shareholders on record as of February 26.
According to Insider Monkey’s fourth quarter database, 16 hedge funds were bullish on The Bank of N.T. Butterfield & Son Limited (NYSE:NTB), compared to 12 funds in the prior quarter. Phill Gross and Robert Atchinson’s Adage Capital Management is the leading stakeholder of the company, with 1.76 million shares worth $56.6 million.
Prosperity Bancshares, Inc. (NYSE:PB) serves as the bank holding company for Prosperity Bank, offering a range of financial products and services to businesses and consumers. It is one of the most undervalued stocks to monitor. On January 17, Prosperity Bancshares, Inc. (NYSE:PB) declared a $0.56 per share quarterly dividend, in line with previous. The dividend is payable on April 1, to shareholders on record as of March 15.
According to Insider Monkey’s fourth quarter database, 17 hedge funds were bullish on Prosperity Bancshares, Inc. (NYSE:PB), compared to 16 funds in the prior quarter. Brandon Haley’s Holocene Advisors is the leading stakeholder of the company, with 1 million shares worth $68.5 million.
9. Zions Bancorporation, National Association (NASDAQ:ZION)
Number of Hedge Fund Holders: 19
PE Ratio as of March 4: 9.06
Average Upside Potential: 15.6%
Average Analyst Price Target: $45.58
Zions Bancorporation, National Association (NASDAQ:ZION) operates across several states, including Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming. The company provides a range of banking services to businesses and consumers. Zions Bancorporation, National Association (NASDAQ:ZION) is one of the most undervalued stocks to watch. The company paid a $0.41 per share quarterly dividend on February 22 and the board also authorized an up to $35 million share buyback program in the beginning of February.
According to Insider Monkey’s fourth quarter database, 19 hedge funds were bullish on Zions Bancorporation, National Association (NASDAQ:ZION), compared to 23 funds in the prior quarter. John Overdeck and David Siegel’s Two Sigma Advisors is the leading stakeholder of the company, with 1.90 million shares worth $83.4 million.
FMI made the following comment about Zions Bancorporation, National Association (NASDAQ:ZION) in its Q1 2023 investor letter:
“Our two most impacted holdings during this recent crisis were Zions Bancorporation, National Association (NASDAQ:ZION) and discount broker Charles Schwab. We believe both have sticky deposit bases, best-in-class management teams, conservative balance sheets, and attractive valuations. In both cases, outside of absolute contagion/panic resulting in a run on their deposits (a very low probability tail risk), we view the impact on the businesses as more of an “earnings” event, not a “balance sheet” event. Zions and Schwab got caught up in the contagious fear around SVB’s collapse due to some optical similarities between their balance sheets (namely bonds carried at mark-to-market losses), and Zions being a West Coast regional bank. We believe the similarities largely end there. Zions has a much more diverse deposit base than SVB. We estimate that half of Zions’ deposit base are small and medium-sized business operating deposits, which have historically been quite stable and a competitive advantage. Nearly half of Zions’ deposits are FDIC-insured, and the bank has ample liquidity to meet outflows without selling its securities portfolio. Similarly, Schwab’s retail deposit base is very sticky. Over 80% of their customers’ cash is FDIC-insured, and the cash is spread across approximately 34 million brokerage accounts (average ~$10,000 in bank cash per account). Schwab has more balance sheet liquidity than deposits. In both cases, there appears to be a low risk of correlation among their respective client bases. Although there will likely be some profit headwinds that stem from this crisis, we viewed the large declines in these shares as overly punitive, and thus believe the risk/reward for each is increasingly attractive. We have added to both positions.”
Old National Bancorp (NASDAQ:ONB) is next on our list of the most undervalued stocks in the banking sector. It is a bank holding company for Old National Bank, offering a variety of financial services to individual and commercial customers in the United States. On February 22, Old National Bancorp (NASDAQ:ONB) declared a quarterly dividend of $0.14 per share, in line with previous. The dividend is payable on March 15, to shareholders on record as of March 5. The company’s board also authorized a stock buyback initiative with a cap of $200 million, in effect until February 28, 2025.
According to Insider Monkey’s fourth quarter database, 19 hedge funds were bullish on Old National Bancorp (NASDAQ:ONB), compared to 20 funds in the last quarter. Ken Griffin’s Citadel Investment Group is the biggest stakeholder of the company, with 3.94 million shares worth $66.7 million.
7. Pinnacle Financial Partners, Inc. (NASDAQ:PNFP)
Number of Hedge Fund Holders: 20
PE Ratio as of March 4: 11.40
Average Upside Potential: 18.52%
Average Analyst Price Target: $96.50
Pinnacle Financial Partners, Inc. (NASDAQ:PNFP) is a bank holding company for Pinnacle Bank, offering diverse banking products and services to individuals, businesses, and professional entities in the United States. It is one of the most undervalued stocks to buy. On January 16, Pinnacle Financial Partners, Inc. (NASDAQ:PNFP) announced a Q4 non-GAAP EPS of $1.68, beating market estimates by $0.01. However, the revenue came in at $396.34 million, missing Wall Street consensus by $20.03 million.
According to Insider Monkey’s fourth quarter database, 20 hedge funds were long Pinnacle Financial Partners, Inc. (NASDAQ:PNFP), compared to 23 funds in the prior quarter. James Hanna’s North Reef Capital is the largest stakeholder of the company, with 1.64 million shares worth $143 million.
Gator Capital Management made the following comment about Pinnacle Financial Partners, Inc. (NASDAQ:PNFP) in its first quarter 2023 investor letter:
“A second but higher risk opportunity is in select regional banks. Coming into March, regional banks were already at the low end of their long-term valuation range. In March, the regional bank index declined 29%, and many well-run regional banks declined more than the index. We admit there are many new negatives for regional banks in the aftermath of the Bank Crisis. Still, we think they have become too cheap and have the potential to outperform as we get clarity on the going forward business model.
Western Alliance Bancorporation (NYSE:WAL) ranks 6th on our list of the most undervalued stocks in the banking industry. It is a bank holding company for Western Alliance Bank, operating mainly in Arizona, California, and Nevada. The company's three segments are Commercial, Consumer Related, and Corporate & Other. Western Alliance Bancorporation (NYSE:WAL) paid a $0.37 per share quarterly dividend on March 1.
According to Insider Monkey’s fourth quarter database, 33 hedge funds were long Western Alliance Bancorporation (NYSE:WAL), compared to 36 funds in the last quarter. Ken Griffin’s Citadel Investment Group is the leading stakeholder of the company, with 2.5 million shares worth $167.5 million.
In addition to JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), and Citigroup Inc. (NYSE:C), Western Alliance Bancorporation (NYSE:WAL) is one of the best banking stocks to invest in.
Miller Value Deep Value Select Strategy stated the following regarding Western Alliance Bancorporation (NYSE:WAL) in its fourth quarter 2023 investor letter:
“During the quarter, our largest positive contributor was Western Alliance Bancorporation (NYSE:WAL), whose market price was up more than 40%. Western is a leading national commercial bank with a capital-light business model. The company appears to me to be positioned for long-term growth at the high end of their peer group. WAL has industry-leading underwriting (as evidenced by their low loss rate) and return on assets, which, in my view, support their 18-20% target return on common tangible equity target. Consensus expectations remain in the 15% range potentially providing a nice ongoing variant. Western’s mortgage business is also a “hidden asset” not being sufficiently recognized in the company’s current share price in my opinion. At more than 10% of their company revenue and near trough profitability, any future recovery in the mortgage market from lower interest rates could provide greater future earnings power. WAL’s shares remain attractively priced with a price-to-estimated earnings ratio (FY2) below 7x, a 40% discount to its historical long-term average and a greater than 30% discount to their banking peer group.”
