The first quarter of 2024 was the banner one for the S&P 500 Index. It rallied more than 10% during the period, thus marking the best first-quarter performance in five years.

This also reflected that the momentum that started in November 2023 has continued this year as well. The primary drivers for the steady uptrend in the index are the clarity on the path of interest rates and robust economic growth, along with persistently cooling inflation numbers. Thus, almost all the sectors within the S&P 500 Index rallied during the first quarter. Among the top three was the Financial Services, which gained 12% during the said time frame.

One of the largest constituents of the sector – banks – were in the spotlight as the Federal Reserve continued to signal a 75-basis points cut in rates this year. Of the banks that are part of the S&P 500 Index, only Citigroup (C Quick QuoteC - Free Report) , Wells Fargo (WFC Quick QuoteWFC - Free Report) and JPMorgan (JPM Quick QuoteJPM - Free Report) outperformed the index. These three currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Here’s how these three big banks have performed in the first quarter of 2024:

Price Performance in Q1
 

Image Source: Zacks Investment Research

Before we discuss the above-mentioned three banks, let’s check out the reasons (in detail) that drove investor confidence in bank stocks.

One of the key reasons for the bullish investor sentiments was the Fed’s signal of interest rate cuts later in 2024. Though, initially, the market participants projected the first cut in rates occurring as early as March, incoming economic data showed that the central bank will wait for further confirmation on inflation cooling down before doing so.

Secondly, the imminent recession risk is largely gone and the U.S. economy is showing resilience. The country’s real GDP increased to 2.5% in 2023 from 1.9% in 2022. Further, per the Fed’s latest Summary of Economic Projections, the real GDP is expected to grow at the rate of 2.1% in 2024. This is an upward swing from the prior expectation of 1.4% growth. With the anticipation that inflation will continue to come closer to the Fed’s 2% goal, the chances of the U.S. economy’s soft landing are high.

Hence, driven by these developments, investors continue to be bullish on bank stocks. With the central bank keeping the rates stable at 5.25-5.5%, deposit costs are stabilizing and even coming down. Thus, pressure on the net interest margin is likely to decline eventually.  Further, as the economy remains strong, the lending scenario is likely to be decent. Hence, the banks’ net interest income (NII) is expected to be stable.

But banks are not fully out of the woods. The major concern is the exposure to commercial real estate (CRE) loans. This is turning out to be a stress on the banks’ asset quality. The major rating agencies, including S&P Global Ratings, Fitch and Moody’s, have been flagging exposure to CRE loans as a key concerning factor for the industry. The slump in commercial property values will likely hurt the regional banks to some extent.

Nevertheless, at present, investors are seeing interest rate cuts and robust economic growth as major positives for the industry than the CRE exposure woes. Driven by these favorable factors, bank stocks are expected to keep performing solidly in the near term.

Banks Perform Impressively Backed by Robust Fundamentals

Citigroup: As a globally diversified financial services holding company, Citigroup continues to increase its fee-based business mix and shrink non-core businesses. In sync with this, the company has announced the completion of major actions to simplify its operating structure and improve performance, which were announced in September 2023.

As a part of this initiative, since September, C has eliminated more than 5,000 jobs and plans to trim management layers to eight from 13 and its global workforce by 20,000 over the next two years. Such efforts will make the decision-making process swifter, drive increased accountability and enhance the focus on clients.

Citigroup is also on track with its major strategic action to exit the consumer banking business in 14 markets across Asia and the EMEA. The bank has divested businesses in nine markets, including Australia, Bahrain, India, Malaysia, the Philippines, Taiwan, Thailand, Vietnam and Indonesia. It has substantially wound down consumer banking businesses in South Korea, Russia and China. Also, the company has restarted its sale procedure in Poland. It remains on track to separate its Mexico business through an IPO in 2025.

Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke fee income growth.

It seems that the investors are optimistic about initiatives being undertaken to simplify operations, and this supported the company’s stock to become the top-performing bank in the S&P 500 index.

Further, management expects revenues in the range of $80-$81 billion in 2024, up from $75.3 billion in 2023. Though NII is expected to be marginally down because of higher funding costs, fee income is likely to offer some support.

Wells Fargo: One of the largest banks in the country, Wells Fargo is gradually resolving regulatory issues that have been plaguing it since the revelation of the sales scandal in 2016. Though it remains under close supervision of the regulatory authorities and has an asset cap in place, the recent developments show the lender is on the right path.

Since third-quarter 2020, WFC has been actively engaging in cost-cutting measures, including the streamlining of its organizational structure, closure of branches and reduction in headcount. The bank delivered gross expense savings aggregating $10 billion in 2021-2023. It expects to continue with these efficiency initiatives in 2024. Management projects non-interest expenses to be $52.6 billion this year, indicating a decline from the $55.6 billion in 2023.

Wells Fargo is revamping its home lending operation by reducing its mortgage servicing portfolio and exiting the correspondent lending business. As the demand for mortgages and refinancing activities continue to be low due to higher rates, the company is executing this plan to “continue to reduce risk in the mortgage business.”

WFC continues to build on its deposit base, which witnessed a three-year (ended 2023) CAGR of 1.1%. A large base of retail clients, as well as considerable strength in the consumer business and commercial banking segments, will likely aid the deposit balance in the upcoming period.

JPMorgan: The largest U.S. bank, JPMorgan, is expected to keep benefiting from higher rates, loan growth, strategic acquisitions, business diversification efforts, strong liquidity position and initiatives to expand the branch network in new markets.

Last May, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal immensely supported the company’s financials last year.

By expanding its footprint in newer markets, JPMorgan will be able to improve cross-selling opportunities by increasing its presence in the card and auto loan sectors. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to further expand the reach of its digital bank across the European Union countries. JPMorgan is also focused on expanding the CIB and AWM businesses in China.

JPMorgan has a solid capital deployment plan. In March, the company raised its quarterly dividend for the second time in the past year. It announced a dividend of $1.15 per share, marking a 9.5% increase from the prior payout. Last year, following the clearance of the 2023 stress test, JPM increased its quarterly dividend by 5% to $1.05 per share.

Raising quarterly dividends seems to be a way to reward its shareholders after notching record profits in 2023 despite turmoil in the banking industry and challenging macroeconomic backdrop. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital deployments. This will also enhance shareholder value.