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2 Major Regional Banks to Buy on High Rates, Economic Growth
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The Zacks Major Regional Banks will benefit from high rates as net interest income (NII) continues to witness a marginal rise despite increasing funding costs impeding net interest margin (NIM) expansion. Solid economic growth and modest loan demand will also support banks’ financials in the near term.
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 Wells Fargo & Company (WFC - Free Report) and Northern Trust Corporation (NTRS - Free Report) are worth investing in.
About the Industry
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.
4 Themes Influencing the Major Regional Banks Industry
High-Interest Rates: The Fed’s aggressive monetary policy since March 2022 has led the interest rates to touch a 23-year high of 5.25-5.5% as it continues to fight ‘sticky’ inflation. While the inflation numbers are cooling down, the path for it to reach the central bank’s target of 2% is going to be bumpy. Hence, the market participants seem to have watered down the chances of a 75-basis point cut in interest rates this year. The tighter job market is also not helping the case.
While the faster pace of rate hikes puts pressure on major banks’ net interest margin (NIM) because of an increase in funding costs, high rates for a longer period will be a boon for the industry players on the back of decent economic growth, resilient consumers and modest deposit inflows. This will support banks’ NII growth, though at a slower pace than in 2023.
Business Restructuring Initiatives: Major regional banks are taking strategic actions 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 and into Europe and Asia. Several industry players are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Modest Loan Demand: The central bank’s aggressive monetary policy lowered the demand for loans due to fears of a severe economic downturn/recession. Nonetheless, the Fed’s Summary of Economic Projections released in March indicates that the U.S. economy will slow down slightly this year and grow at a rate of 2.1%. In 2023, the U.S. economy grew at a rate of 2.5%, per the data released by the Bureau of Economic Analysis.
While the high rates kept the borrowers on the sidelines for the major part of last year, the Fed’s higher-for-longer stance is likely to reverse the trend to some extent in 2024. The demand for loans is likely to tick up marginally as borrowers get used to the high interest rate environment.
Weakening 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. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Now, given the current macroeconomic headwinds, industry players are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically 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. Since the end of October 2023, the industry’s earnings estimates for the current year have been revised 1.5% upward.
Before we present a couple of major bank stocks that are worth buying, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely outperformed both the S&P 500 composite and its sector over the past year. While stocks in this industry have collectively surged 42.2% over the period, the Zacks S&P 500 composite has jumped 24.5%, and the Zacks Finance sector has rallied 23.1%.
One-Year Price Performance
Industry's Valuation
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 1.98X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 1.93X 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 10.89X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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, a comparison of 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 4.09X. This is way above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
2 Major Regional Banks to Bet on Right Away
Wells Fargo: With total assets worth $1.96 trillion as of Mar 31, 2024, Wells Fargo is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products through more than 5,000 branches, a broad ATM network, the Internet and other distribution channels across North America and globally.
Though WFC has been facing problems related to its 2016 sales scandal, management has been striving hard to overcome this matter and lift the asset cap imposed on it by the Fed.
Wells Fargo is focused on reducing its expense base. Expense reduction efforts, such as streamlining organizational structure, closing branches and reducing headcount, undertaken since third-quarter 2020 have been aiding expense management. The company delivered gross expense savings aggregating $10 billion in 2021-2023. The company expects to take on these efficiency initiatives this year too.
Further, this Zacks Rank #1 (Strong Buy) company continues to build on its deposit base, which witnessed a three-year (ended 2023) CAGR of 1.1%. While the pace of deposit growth is likely to continue moderating in the near term, a large base of retail clients will likely support the deposit balance in the upcoming period. You can see the complete list of today’s Zacks #1 Rank stocks here.
With a market cap of $209.5 billion, Wells Fargo is expected to regain its lost glory with the above-mentioned strategic efforts. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 5.5% upward for 2024. The stock has jumped 44.7% over the past six months.
Price and Consensus: WFC
Northern Trust: With total assets worth $156.1 billion as of Mar 31, 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. The growth of NII was aided by an improvement in loan balances and higher rates. Also, robust pipelines in the Asset Servicing and Wealth Management segments will likely drive organic growth in the upcoming period.
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.
This Zacks Rank #1 company’s capital distributions seem impressive. In 2022, the company 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, comparing 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 $17.1 billion. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 8.5% upward for 2024. The stock has gained 18.7% over the past six months.
Price and Consensus: NTRS
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2 Major Regional Banks to Buy on High Rates, Economic Growth
The Zacks Major Regional Banks will benefit from high rates as net interest income (NII) continues to witness a marginal rise despite increasing funding costs impeding net interest margin (NIM) expansion. Solid economic growth and modest loan demand will also support banks’ financials in the near term.
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 Wells Fargo & Company (WFC - Free Report) and Northern Trust Corporation (NTRS - Free Report) are worth investing in.
About the Industry
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.
4 Themes Influencing the Major Regional Banks Industry
High-Interest Rates: The Fed’s aggressive monetary policy since March 2022 has led the interest rates to touch a 23-year high of 5.25-5.5% as it continues to fight ‘sticky’ inflation. While the inflation numbers are cooling down, the path for it to reach the central bank’s target of 2% is going to be bumpy. Hence, the market participants seem to have watered down the chances of a 75-basis point cut in interest rates this year. The tighter job market is also not helping the case.
While the faster pace of rate hikes puts pressure on major banks’ net interest margin (NIM) because of an increase in funding costs, high rates for a longer period will be a boon for the industry players on the back of decent economic growth, resilient consumers and modest deposit inflows. This will support banks’ NII growth, though at a slower pace than in 2023.
Business Restructuring Initiatives: Major regional banks are taking strategic actions 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 and into Europe and Asia. Several industry players are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Modest Loan Demand: The central bank’s aggressive monetary policy lowered the demand for loans due to fears of a severe economic downturn/recession. Nonetheless, the Fed’s Summary of Economic Projections released in March indicates that the U.S. economy will slow down slightly this year and grow at a rate of 2.1%. In 2023, the U.S. economy grew at a rate of 2.5%, per the data released by the Bureau of Economic Analysis.
While the high rates kept the borrowers on the sidelines for the major part of last year, the Fed’s higher-for-longer stance is likely to reverse the trend to some extent in 2024. The demand for loans is likely to tick up marginally as borrowers get used to the high interest rate environment.
Weakening 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. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Now, given the current macroeconomic headwinds, industry players are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically 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. Since the end of October 2023, the industry’s earnings estimates for the current year have been revised 1.5% upward.
Before we present a couple of major bank stocks that are worth buying, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely outperformed both the S&P 500 composite and its sector over the past year. While stocks in this industry have collectively surged 42.2% over the period, the Zacks S&P 500 composite has jumped 24.5%, and the Zacks Finance sector has rallied 23.1%.
One-Year Price Performance
Industry's Valuation
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 1.98X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 1.93X 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 10.89X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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, a comparison of 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 4.09X. This is way above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
2 Major Regional Banks to Bet on Right Away
Wells Fargo: With total assets worth $1.96 trillion as of Mar 31, 2024, Wells Fargo is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products through more than 5,000 branches, a broad ATM network, the Internet and other distribution channels across North America and globally.
Though WFC has been facing problems related to its 2016 sales scandal, management has been striving hard to overcome this matter and lift the asset cap imposed on it by the Fed.
Wells Fargo is focused on reducing its expense base. Expense reduction efforts, such as streamlining organizational structure, closing branches and reducing headcount, undertaken since third-quarter 2020 have been aiding expense management. The company delivered gross expense savings aggregating $10 billion in 2021-2023. The company expects to take on these efficiency initiatives this year too.
Further, this Zacks Rank #1 (Strong Buy) company continues to build on its deposit base, which witnessed a three-year (ended 2023) CAGR of 1.1%. While the pace of deposit growth is likely to continue moderating in the near term, a large base of retail clients will likely support the deposit balance in the upcoming period. You can see the complete list of today’s Zacks #1 Rank stocks here.
With a market cap of $209.5 billion, Wells Fargo is expected to regain its lost glory with the above-mentioned strategic efforts. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 5.5% upward for 2024. The stock has jumped 44.7% over the past six months.
Price and Consensus: WFC
Northern Trust: With total assets worth $156.1 billion as of Mar 31, 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. The growth of NII was aided by an improvement in loan balances and higher rates. Also, robust pipelines in the Asset Servicing and Wealth Management segments will likely drive organic growth in the upcoming period.
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.
This Zacks Rank #1 company’s capital distributions seem impressive. In 2022, the company 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, comparing 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 $17.1 billion. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 8.5% upward for 2024. The stock has gained 18.7% over the past six months.
Price and Consensus: NTRS
