Farran Powell
Farran Powell
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Updated 9:03 a.m. UTC May 24, 2024
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Higher interest rates have historically been good news for bank stocks. But the correlation between high interest rates and bank profits isn’t as straightforward as it may seem.
Elevated interest rates weigh on the economy, and bank loan growth slows if the U.S. economy dips into a recession. In addition, higher interest rates hurt bond values, and many banks have large portfolios of bond investments.
We selected the best bank stocks to buy in 2024 based on a range of factors: attractive valuations, strong underlying fundamentals and bullish ratings from Wall Street analysts.
*Market data cited is as of April 30.
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Best bank stocks
- .
- Bank of America (BAC).
- .
- Citigroup (C).
- UBS (UBS).
JPMorgan Chase & Co. (JPM)
Market cap
YTD performance
What you should know
JPMorgan Chase is one of the largest global financial services companies, with nearly $4 trillion in assets under management.
JPMorgan may be the biggest winner of the 2023 banking crisis. In early May of 2023, JPMorgan won an auction to acquire $92 billion in deposits, $173 billion in loans and $30 billion in securities from First Republic, which regulators had seized following a massive wave of customer withdrawals. JPMorgan paid the Federal Deposit Insurance Corp. about $10.6 billion for the assets.
Not only does the First Republic deal provide opportunities for earnings and revenue growth, but it is also a clear sign to investors that JPMorgan’s management wasn’t concerned about the bank’s liquidity or balance sheet during the height of the banking crisis.
Pros and cons
Pros
- No major problems with balance sheets, regulatory concerns or deposit runs.
- Investing heavily in organic growth opportunities and distribution platforms.
- Rigorously stress-tested annually by the Federal Reserve as a Category I bank.
Cons
- Net interest income could be at risk if the U.S. economy dips into a recession.
- Organic growth investments are not guaranteed to pay off.
- The First Republic acquisition further complicates an already complex global banking business.
More details
Bank of America (BAC)
Market cap
YTD performance
What you should know
Bank of America is one of the largest U.S. banks and financial holdings companies, offering commercial and consumer banking, investment banking, and wealth management services. The bank has roughly $1.5 trillion in assets under management.
In the first quarter of 2023, Bank of America reported 13% revenue growth to $26.3 billion and 18% earnings per share growth. Even in a slowing economy, the bank reported 7% year-over-year growth in average loan and lease balances, led by commercial loan growth and an uptick in credit card balances. In addition, the bank’s tangible book value per share grew 9% in the quarter, while average deposits declined just 3%. Bank of America also added about 130,000 new consumer checking accounts in the first quarter.
Pros and cons
Pros
- Merrill Lynch is one of the leading U.S. brokerages.
- High interest rate sensitivity should create opportunities for superior earnings growth.
- Rigorously stress-tested annually by the Federal Reserve as a Category I bank.
Cons
- High rate sensitivity could become a headwind if an economic downturn forces interest rate cuts.
- After years of cost-cutting, little fat is left to be trimmed to offset rising expenses.
- Limited opportunities for fee growth if the economy weakens.
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Wells Fargo & Co. (WFC)
Market cap
YTD performance
What you should know
Wells Fargo is one of the largest U.S. banks and has a mostly domestic lending footprint. The company has roughly $1.9 trillion in assets.
Wells Fargo is in the process of a multiyear restructuring plan following a string of operational missteps that culminated in a scandal involving bankers creating millions of fraudulent savings and checking accounts for Wells Fargo customers without their consent. The Federal Reserve capped Wells Fargo’s assets at around $2 trillion in 2018 as a penalty for the scandal, and that cap remains in place today.
Despite the cap, Wells Fargo reported $4.9 billion in net income, repurchased 86.4 million shares ($4 billion in stock) and improved its Common Equity Tier 1 capital ratio in the first quarter of 2023.
Pros and cons
Pros
- Relatively high interest rate sensitivity among U.S. megabanks creates an opportunity for peer-leading earnings growth.
- The eventual lifting of the Fed asset cap could be a major bullish catalyst.
- Leading market share in small and medium-sized business banking.
Cons
- Negative investor sentiment following several regulatory missteps in the 2010s.
- Asset cap has limited Wells Fargo’s ability to take advantage of economic growth.
- The bank will remain under heavy regulatory scrutiny for the foreseeable future.
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Citigroup (C)
YTD performance
What you should know
Citigroup is a diversified bank that provides a wide range of financial services to customers around the world. Citigroup barely survived the 2008 financial crisis and was even partially nationalized out of necessity. In the past 15 years, the bank has been restructuring its business to eliminate risk and scale down and focus on its operations.
In the first quarter of 2023, Citigroup completed the sale of its India consumer banking business and reported 6% year-over-year revenue growth, excluding the impact of asset divestments. The company notes Treasury and trade solutions growth has been strong, and Citigroup is generating momentum in its card business.
Citigroup also recently announced plans to complete an initial public offering for its Mexican business, Banamex, by the end of 2025.
Pros and cons
Pros
- Citi has made significant structural improvements to its business since the 2008 financial crisis.
- Asset sales simplify the business, improve the balance sheet and create opportunities for capital returns.
- Forward earnings multiple of around 7 suggests an extremely attractive valuation.
Cons
- Citigroup has significantly underperformed the S&P 500 and lagged its “big four” U.S. megabank peers over the past decade.
- Citigroup has been paring down its business while competitors have taken advantage of growth opportunities.
- Citigroup could not find a buyer for its Mexico business after 16 months of pursuing a deal.
More details
UBS (UBS)
Market cap
YTD performance
What you should know
UBS is an international investment bank and financial services company headquartered in Switzerland, with over $3 trillion in assets.
Like JPMorgan, UBS took advantage of the 2023 banking crisis by acquiring distressed Swiss investment banking competitor Credit Suisse in a $3.2 billion takeover deal. UBS will acquire an estimated $54 billion in Common Equity Tier 1 capital as part of the Credit Suisse deal, and UBS has guided for a 74% increase in its tangible net asset value. In addition, the Swiss government has agreed to cover up to $10 billion in losses as UBS integrates Credit Suisse’s portfolio.
In the first quarter of 2023, UBS reported $1 billion in net profit and said it experienced client inflows across all of its operating regions.
Pros and cons
Pros
- Credit Suisse’s acquisition suggests UBS management is confident about liquidity and balance sheet health.
- The financial backing of the Swiss government helps reduce the risk.
- Post-merger UBS will be one of the world’s largest banks, with roughly $5 trillion in assets.
Cons
- Credit Suisse’s buyout creates significant execution risks.
- Integration of Credit Suisse assets will be costly and time-consuming.
- UBS still faces litigation costs and uncertainty related to U.S. residential mortgage-backed securities issued in the five years leading up to 2007.
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Compare the best bank companies
Methodology
The best bank stocks all trade on a major U.S. stock exchange and meet the following criteria as of September 2023:
- Consensus analyst recommendation of “buy” or better. A high number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market.
- Market capitalization of at least $10 billion. If a company has a leading market share and competitive advantages in a sizable industry, it will have a market cap greater than $10 billion. Small- and mid-cap stocks are generally more volatile, have a higher degree of uncertainty and risk associated with their business outlooks, and do not get as much media and analyst coverage.
- Forward earnings multiple less than 10. One of the most common and basic measures of shareholder value is how much profit a company earns per share of stock. Stocks with forward earnings multiples under 10 have extremely attractive valuations relative to the overall and are positioned to outperform during a cyclical economic downturn.
- Dividend yield of at least 2%. Not only does a dividend provide a consistent source of income for investors, but it is also a sign a company’s management is confident about its financial situation. When a company runs into liquidity problems or experiences financial stress, one of the first lines of defense is typically cutting or eliminating its dividend.
Why other stocks didn’t make the cut
In early 2023, investors got a wake-up call about how dangerous it can be to invest in bank stocks. Roughly 15 years after toxic bank assets nearly collapsed the entire U.S. financial system, plummeting bond portfolio values, exposure to cryptocurrency and fears over deposit runs triggered massive sell-offs in several U.S. regional bank stocks in March 2023.
The crisis ultimately led to the collapse of a handful of U.S. regional banks, underscoring the importance of selecting bank stocks with solid balance sheets, strong risk management, sizable profits and attractive valuations.
Bank stocks with healthy underlying business fundamentals also typically pay generous dividends, so there’s no reason for bank investors to settle for a yield of under 2%.
Final verdict
The U.S. banking crisis weighed on bank stocks in 2023, but it may have also created opportunities for investors to scoop up high-quality bank stocks at a valuation discount.
"With earnings expectations now stable and valuations still at a deep discount to the overall U.S. equity market, bank stocks should be able to claw back more of their (year-to-date) losses," DataTrek Research co-founder Nicholas Colas said.
Colas says bank stocks have performed well since the banking crisis fears peaked in early May.
"We believe it will continue through the end of the quarter at the very least, as investors look for laggard groups that stand to benefit from a still-strong U.S. economy," he said.
Frequently asked questions (FAQs)
Yes, high-quality bank stocks that have sound balance sheets, strong risk management measures and attractive valuations based on fundamental metrics such as P/E ratio, price-to-tangible book value and price-to-book value can be solid long-term investments — particularly during periods in which economic growth is decent and interest rates are high.
Bank stock investors can mitigate the risk of bank failures by taking a diversified approach to bank stocks rather than putting all their eggs in one basket.
It can be difficult to predict what a stock or group of stocks will do in the short and medium term, but top bank stocks have historically performed well over the long term.
If you’re seeking a nod from other investing playbooks, Bank of America and Citigroup are among the largest stock holdings of legendary billionaire value investor Warren Buffett.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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Wayne Duggan is a regular contributor for Forbes Advisor and U.S. News and World Report and has been a staff writer for Benzinga since 2014. He is an expert in the psychological challenges of investing and frequently reports on breaking market news and analyst commentary related to popular stocks. Some of his prior work includes contributing news and analysis to Seeking Alpha, InvestorPlace.com, Motley Fool, and the Lightspeed Active Trading blog. He’s the author of the book "Beating Wall Street With Common Sense," which focuses on practical investing strategies to outperform the stock market. He resides in Biloxi, Mississippi
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Farran Powell is the lead editor of investing at USA TODAY Blueprint. She was previously the assistant managing editor of investing at U.S. News and World Report. Her work has appeared in numerous publications including TheStreet, Mansion Global, CNN, CNN Money, DNAInfo, Yahoo! Finance, MSN Money and the New York Daily News. She holds a BSc from the London School of Economics and an MA from the University of Texas at Austin. You can follow her on Twitter at @farranpowell.
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