Chicago, IL – January 6, 2025 – Today, Zacks Equity Research discusses U.S. Bancorp USB, Truist Financial Corp. TFC, The Bank of New York Mellon Corp. BK and Northern Trust Corp. NTRS.
Link: https://www.zacks.com/commentary/2391410/major-regional-bank-industry-healthy-4-stocks-to-gain-in-2025
The Zacks Major Regional Banks will benefit from the Federal Reserve's interest rate cuts as the deposit/funding costs come down and the industry-wide lending backdrop improves. Further, a decent economic expansion will support the industry players' net interest income (NII) and margins.
Business restructuring/expansion initiatives and digitization will offer support. Though weakening asset quality is likely to exert pressure on the financials to some extent, major banks like U.S. Bancorp, Truist Financial Corp., The Bank of New York Mellon Corp. and Northern Trust Corp. are worth keeping an eye on.
The Zacks Major Regional Banks industry includes the nation's largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation's economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.
Apart from traditional banking services, which are the source of the net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. Therefore, a large revenue source for these banks is fees and commissions earned from these services.
While banks reaped huge benefits in the form of higher net interest margin (NIM) and NII during the initial phase of high rates, challenges related to slowing loan demand, increased funding costs and reduced liquidity became more apparent gradually. Hence, as the interest rates come down, banks will likely benefit from the fall/stabilization of deposit costs and a gradual improvement in the lending scenario. There will likely be near-term pain in the form of lower NII and NIM, but the industry players are expected to gain from reduced interest rates eventually.
Modest Rise in Loan Demand: The central bank's aggressive monetary policy hurt loan demand amid the risk of a severe economic downturn/recession. The Fed's Summary of Economic Projections released in December 2024 indicates that the U.S. economy will continue to show resilience and grow 2.5% in 2024 (the same rate as 2023).
Further, economic growth is expected to slow marginally to 2.1% this year. While the high rates kept the borrowers on the sidelines for more than a year now, interest rate cuts and decent economic growth are likely to reverse the trend to some extent. As the demand for loans ticks up, major regional banks' NII and NIM are expected to benefit from the same.
Restructuring Initiatives: Major regional banks are undertaking initiatives to expand into new avenues and lower their dependence on spread income. The business restructuring is essential for technological advancement and further domestic/global expansion to continue improving profitability.
The industry players are constantly investing in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services. Major regional banks are also aggressively expanding their footprint outside the United States. Several industry players are re-evaluating their business structure to simplify operations and do away with less profitable ones.
Poor Asset Quality: For most of 2020, major regional banks built extra provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. However, with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Of late, given the current macroeconomic headwinds, industry players are building additional reserves to counter any adverse fallout. While conservative lending policy and the resilience of borrowers helped banks keep their asset quality manageable, several metrics have crossed the pre-pandemic era levels. This signals the gradual deterioration of the industry players' asset quality.
The Zacks Major Regional Banks industry is a 10-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #47, which places it in the top 19% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group's earnings growth potential. In the past year, the industry's earnings estimates for 2024 have been revised 6% upward.
Before we present some major bank stocks to keep on your radar, let's take a look at the industry's recent stock market performance and valuation picture.
The Zacks Major Regional Banks industry outperformed its sector in 2024 while lagging the S&P 500 composite.
Stocks in this industry collectively surged 22.5% last year. In the same time frame, the Zacks S&P 500 composite jumped 24.4% and the Zacks Finance sector rallied 17.2%.
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 2.30X. This compares with the highest level of 3.23X, the lowest of 1.14X and the median of 2.30X over the past five years. The industry is trading at a huge discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 14.43X.
As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. However, comparing the group's P/TBV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector's trailing 12-month P/TBV came in at 5.26X. This is way above the Zacks Major Regional Banks industry's ratio.
U.S. Bancorp: Headquartered in Minneapolis, MN, U.S. Bancorp provides banking and investment services, principally operating in the Midwest and West regions of the United States. A solid business model and diverse revenue streams are likely to aid its financials.
USB has experienced solid growth in average loans and deposits in the past few years as it continued to expand and deepen relationships with current customers and acquire new customers and market share. The solid pipeline in the commercial and credit card space is expected to drive loan growth. Also, stabilizing deposit trends will continue to support deposit growth.
Organic growth and diverse revenue sources are key strengths of U.S. Bancorp. Management is encouraged by current trends in client growth and penetration rates as evidenced by the continued strength of its fee revenue businesses. Hence, the company is well-positioned to improve its revenue trend, which is backed by growth in fee income and NII.
U.S. Bancorp has completed several strategic acquisitions over the years, which have opened new markets to it and fortified existing markets. In 2022, it acquired MUFG Union Bank's core regional banking franchise, expanding its branch network and enjoying greater access to digital banking tools. Such buyouts and the ongoing investments in innovative product enhancements, services and people will strengthen this Zacks Rank #3 (Hold) company's fee-based businesses. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
USB has a market cap of $74.6 billion. Though the Zacks Consensus Estimate for earnings suggests a decline in 2024, it will rebound and grow in 2025. Last year, the stock gained 10.5%.
Truist Financial: Formed following the 'merger of equals' deal between BB&T Corp and SunTrust Banks, Truist Financial has become one of the largest commercial banks in the United States. The company, based in Charlotte, NC, conducts business operations primarily through its bank subsidiary, Truist Bank, and a few other non-bank subsidiaries.
Growth in loans, higher interest rates and Truist Financial's efforts to improve fee income are likely to keep aiding financials. It has been recording an improvement in NII due to decent loan demand and rising rates. Management remains open to strategic business restructuring initiatives to bolster fee income. In sync with this, in May 2024, the company sold its remaining 80% stake in its insurance subsidiary — Truist Insurance Holdings. Subsequently, the bank undertook strategic balance sheet repositioning to support NII in the quarters ahead. These measures bolstered the bank's capitalization and liquidity profile.
Further, in February 2024, the company announced a deal to divest its asset-management subsidiary, Sterling Capital Management LLC. Earlier, this Zacks Rank #3 company had acquired Service Finance Company, which augmented its point-of-sale lending business. Driven by these restructuring efforts, Truist Financial is expected to witness growth in the top line.
TFC has a market cap of $57.6 billion. The Zacks Consensus Estimate for earnings implies growth in 2024 and 2025. The stock jumped 17.5% in 2024.
BNY Mellon: Operating in 35 countries, BNY Mellon provides various products and services to individuals and institutions. Its global client base consists of financial institutions, corporations, government agencies, endowments and foundations, and high-net-worth individuals.
Higher interest rates continue to support BNY Mellon's top-line growth. While the company's NII and NIM declined in 2020 and 2021, both rebounded solidly thereafter. Though higher funding costs will likely weigh on NII, the metric is anticipated to keep improving in the quarters ahead, driven by lower rates.
BNY Mellon's growth initiatives are impressive. The company has been launching several new services and products, digitizing operations and making strategic acquisitions.
In November 2024, BK acquired Berwyn, PA-based Archer Holdco, LLC, a leading technology-enabled service provider of managed account solutions to the asset and wealth management industry. This will bolster the company's retail wealth presence. In September, the company announced plans to launch Alts Bridge, an extensive data, software and services solution.
This Zacks Rank #2 (Buy) company has been trying to gain a foothold in foreign markets and is undertaking several growth initiatives (including launching new services, digitizing operations and making strategic buyouts). Its international revenues are expected to continue improving as the demand for personalized services rises globally.
BNY Mellon has a market cap of $55.9 billion. The Zacks Consensus Estimate for earnings indicates growth in 2024 and 2025. In 2024, the stock jumped 47.6%.
Northern Trust: With total assets worth $155.8 billion as of Sept. 30, 2024, Northern Trust is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals.
Organic growth is the company's key strength. Its revenues witnessed a CAGR of 3.5% over the last three years (2020-2023), driven by rising non-interest income and NII. As the client base expands, the company expects to see a rebound in loan activity. This ongoing focus on wealth management is expected to drive growth in the lending portfolio in the near term. Also, robust pipelines in the Asset Servicing segment will likely drive top-line growth.
NTRS is undertaking expense management efforts to tackle expense growth and reinstate its operating leverage. It focused on disciplined headcount management, vendor consolidation, rationalization of its real estate footprint and process automation. Through such efforts, it will likely improve productivity and meet the financial targets.
The company's capital distributions seem impressive. In 2022, Northern Trust hiked its quarterly dividend by 7% to 75 cents per share. In 2021, the company announced a 25-million share repurchase program with no expiration date. Its debt/equity ratio, which compares favorably with the broader industry, and decent liquidity highlight the fact that such capital-distribution activities are sustainable in the future.
NTRS has a market cap of $20.3 billion. The Zacks Consensus Estimate for earnings indicates growth in 2024 and 2025. The stock, which carries a Zacks Rank of 2, rose 21.5% in 2024.
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report
U.S. Bancorp (USB) : Free Stock Analysis Report
Northern Trust Corporation (NTRS) : Free Stock Analysis Report
Truist Financial Corporation (TFC) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
