In this piece, we will look at the ten best bank stocks to invest in for the long term.
Following the 2024 US presidential election, the banking industry has generated quite a lot of returns on the stock market. Bank stocks are dependent on interest rates, the lending environment, and the costs they incur. While higher rates mean that banks can increase their spread and boost interest earnings, if the rates remain high for too long, then the demand for capital dries up in the industry which affects the amount of money they can lend.
Additionally, higher rates also mean that for some banks, particularly those geared towards consumers, interest expenses also jump since they have to pay out hefty amounts to account holders. The high interest costs experienced by these banks don’t mean that those focused on investment banking are spared the ire of high rates. Investment banks suffer from reduced market activity during periods of high interest rates since most investors prefer the comfort of deposit accounts and other vehicles to enjoy risk-free interest income.
These principles have been evident on the balance sheets of some of the biggest banks in America during the Federal Reserve’s latest interest rate hiking cycle. As an example, consider the H1 2024 results of America’s second-largest bank by asset size. For the six months ending in June 2023, the bank earned $61 billion in interest income. This marked a strong 118% annual growth as the bank basked in the two-decade-high interest rate era in the United States. At the same time, however, the firm’s interest expenses sat at $32.4 billion to mark an even greater 731% annual jump. As a result, while pre-expense interest income grew by triple-digit percentages, after accounting for interest expense, the net interest income marked a 19% growth and was $28.6 billion.
Similarly, higher rates also mean that banks focused on investment markets end up struggling. This has been the case for America’s fifth-largest bank by asset size. While Wall Street in 2023 and 2024 has seen broader indexes driven by investors’ AI euphoria, in 2022, the markets faced one of their worst years in recent history. Back then, the Federal Reserve unleashed back-to-back 75 basis point interest rate hikes, and most stocks that were not geared to withstand the new economic conditions ushered by the high rates stumbled. From the start of 2022 to the market’s bottom in October, the flagship S&P index had lost 24.8% while the broader NASDAQ’s technology focus meant that it lost a heftier 34%.
Naturally, the fifth largest bank in America which derived 61% of its noninterest revenue from market-making and investment banking operations as of H1 2024 didn’t thrive in this environment. During H1 2022, its investment banking income dropped by 44% to $3.9 billion since it was accompanied by an even sharper drop of 49% for the second quarter. For the full year, the bank recorded a 95% drop in its 2021 ‘Other principal transaction’ revenue of $11.6 billion. This line item included revenue from its “equity investing activities, including revenues related to our consolidated investments (included in Asset & Wealth Management), and debt investing and lending activities (included across our three segments).”
During the Q4 2022 earnings call, management commented on the tough year. CEO David Solomon shared how while his firm was eager to cut costs, it had to ensure that it kept up with competitors in retaining talent. The bank’s stock fell by 6% in early trading following the earnings as investors were spooked by the fact that operating expenses jumped by 11% at a time when revenue fell by 16% and profit dropped by a painful 66%.
Back then, Solomon also shared how high rates and a tight economy had made things difficult for his firm:
“Simply said, our quarter was disappointing and our business mix proved particularly challenging. These results are not what we aspire to deliver to shareholders. We generated revenues of $10.6 billion and net earnings of $1.3 billion and earnings per share of $3.32. After nine straight quarters of double-digit returns, fourth quarter performance was certainly an outlier. Results were impacted by several near-term challenges given the difficult operating environment. On the revenue front, underwriting volumes remained extremely muted despite green shoots that appeared at the end of the third quarter.
Thicken equity activities, activity levels dropped after a busy and volatile year for many of our clients and our equity investment portfolio saw continued headwinds. We also saw higher loan loss provision and expenses. While compensation expenses were down 15% for the year, quarterly expenses rose modestly versus the third quarter. We always strive to maintain a pay-for-performance culture. With revenues down, compensation was lower. That said we also recognize that we operate in a talent-driven business and we must continue to invest in our people whose dedication is critical to our world class franchise. On our earnings call last July, we first spoke about the challenging operating environment and the proactive measures we were taking on expenses, including slowing hiring velocity and reducing certain components of our non-compensation costs.”
While the incoming Trump administration’s perceived business friendliness and its effects on the economy are one reason the S&P’s bank stock index jumped by 12% after the elections, another reason is regulations. Investors believe that the incoming administration will not be as strict with the big banks. Heading into the elections, regulations were at the forefront of the industry’s concerns as we discussed in our coverage of 10 Best Diversified Bank Stocks to Buy Now. Now, banks are hoping that Basel III Endgame, fair lending rules, heads of regulatory bodies, and private lending are some areas that the new administration might provide them some relief with.
Our Methodology
To make our list of the best bank stocks to buy for the long term, we first ranked all US-traded bank stocks by their market capitalization. Out of these, the 40 most valuable stocks in terms of market capitalization were re-ranked by the number of hedge funds that had bought the shares in Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. The Bank of New York Mellon Corporation (NYSE:BK)
Number of Hedge Fund Investors In Q3 2024: 45
The Bank of New York Mellon Corporation (NYSE:BK) is one of the biggest banks in America. It is a Global Systematically Important Bank (GSIB) as dubbed by the US government. This designation means that the bank is somewhat buffered against disruptive events. The Bank of New York Mellon Corporation (NYSE:BK) is a diversified bank, and it earns revenue through interest and other services. The diversification allows it to benefit from different kinds of economic environments. For instance, during H1 2024, 67% of The Bank of New York Mellon Corporation (NYSE:BK)’s revenue came through investment services, performance, and management fees. These sectors typically benefit when interest rates are dropping, indicating that perhaps the reason behind The Bank of New York Mellon Corporation (NYSE:BK)’s 53.7% year-to-date share price gain. On a micro level, the bank’s One BNY strategy through which it aims to consolidate different business functions such as investment management and accounts should drive the hypothesis.
The Bank of New York Mellon Corporation (NYSE:BK)’s management commented on the One BNY initiative during the Q3 2024 earnings call. Here is what they said:
“This program enabled our top client coverage people and their business partners to take a One BNY view to account planning, creating a shared vision for serving each of our clients holistically across the entire relationship, generating new ideas to meet the clients’ objectives and developing action-oriented plans to deliver on those goals. During the quarter, we also made progress toward running our company better, including the ongoing transition to a platform’s operating model, enhancing the connectivity across our teams and empowering our people to drive change across the company. In September, we went live with the next step on our multiyear plan to unite related capabilities around BNY and elevate our execution by doing things in one place and doing them well.
We now have about 13,000 or about one-quarter of our people working in our new operating model. As we’ve said before, powering our One BNY culture in order to be more for our clients and run our company better requires not just words, but action.”
9. Citizens Financial Group, Inc. (NYSE:CFG)
Number of Hedge Fund Investors In Q3 2024: 46
Citizens Financial Group, Inc. (NYSE:CFG) is a Rhode Island-based regional bank. The firm operates in the consumer, commercial, and private banking markets. The diversification allows exposes it to different markets, which insulates it against a downturn in any one. In particular, Citizens Financial Group, Inc. (NYSE:CFG) benefits from the private banking market which is somewhat insulated against economic weakness as it typically targets high-net-worth individuals. The bank has been making major moves over the past couple of years through acquisitions. It has acquired HSBC’s US retail operations and ICBC to expand its presence in regions such as NYC and Philadelphia. These deals can add to the firm’s profitability, and Citizens Financial Group, Inc. (NYSE:CFG) also benefits from 21% of its total deposits being noninterest paying deposits that provide it with cheap capital to earn money on.
Citizens Financial Group, Inc. (NYSE:CFG)’s management commented on its private banking performance and interest income expectations for the current quarter during the Q3 2024 earnings call:
“Notably, our private bank revenue rose 64% to $49.7 million in the third quarter breaking even by mid-quarter. We are on track for the private bank to start contributing to earnings in the fourth quarter and add meaningfully to EPS next year. Moving to Slide 18. We provide a guide for the fourth quarter. This outlook contemplates a 25 basis point rate cut in each of November and December. We expect NII to be up about 1.5% to 2.5%, driven primarily by a 5 basis point improvement in net interest margin, reflecting the benefit of swaps given lower rates, deposit repricing, non-core runoff and favorable front book back book dynamics, partially offset by lower asset yields.
Spot loans should be up slightly paced by private bank and commercial sponsor activity. Non-interest income should be up mid- to high-single-digits reflecting expected seasonal strength in capital markets. Our deal pipelines are robust and we expect to see a strong finish to the year. We also expect modest improvements across other key categories. Non-interest expense is projected to be up about 2%, and we expect to achieve positive operating leverage.”
8. First Citizens BancShares, Inc. (NASDAQ:FCNCA)
Number of Hedge Fund Investors In Q3 2024: 46
First Citizens BancShares, Inc. (NASDAQ:FCNCA) is a regional bank based in North Carolina. As was the case with the broader banking sector, its shares soared by 18% after the November election. The stock is up 53% year-to-date as it enjoys tailwinds from First Citizens BancShares, Inc. (NASDAQ:FCNCA)’s prudent moves during the 2023 mini-crisis in the banking industry. The firm used this opportunity to buy Silicon Valley Bank and add a large set of customers to its portfolio. However, the share price growth means that First Citizens BancShares, Inc. (NASDAQ:FCNCA) is trading at 42% over its book-value-per-share, which creates questions about whether the stock can appreciate further or if future growth is already priced into the shares. The bank’s decision to buy SVB’s assets also means that in a low interest rate era that stimulates venture capital activity, First Citizens BancShares, Inc. (NASDAQ:FCNCA) can see greater tailwinds from SVB’s presence in the technology industry.
During the Q3 2024 earnings call, First Citizens BancShares, Inc. (NASDAQ:FCNCA)’s management shared details about what might happen in the venture capital market as rates come down:
“So recognizing we’re not providing preliminary guidance on ‘25 at this point, there continues to be a substantial amount of dry powder, capital that’s been committed to venture capital, general partners that has yet to be invested. I think the stat for the third quarter is something like $328 billion or something like that. So a lot of money on the sidelines waiting to be invested. We’ve just seen the first 50 basis point rate cut with the expectation of potentially more. And that we believe that I think Craig said in his opening remarks, we hope we’ll begin to unstick this market, right? That things will continue to thaw and given that we’re now nine, 10 quarters in to what has been a very significant downturn in the innovation economy space. And so while I can’t predict the future and nobody knows exactly when that investment activity will pick back up, I think again, we remain well positioned for that inevitability when it occurs.”
7. U.S. Bancorp (NYSE:USB)
Number of Hedge Fund Investors In Q3 2024: 46
U.S. Bancorp (NYSE:USB) is an American regional banking behemoth. As of Q3, it had a whopping $686 billion in assets and roughly 70,000 total employees. When compared to some of its peers, U.S. Bancorp (NYSE:USB)’s shares have been lackluster in 2024 as they have gained a modest 18%. The share performance is due to the fact that the bank has struggled to balance between its interest income growth and the corresponding rise in interest expense. During the first nine months of 2024, U.S. Bancorp (NYSE:USB)’s net interest income dropped by 8.6% as despite higher interest income its interest expenses out-shot the interest income growth. Consequently, the impact of lower interest rates on the bank’s interest expense is a key factor driving its hypothesis. Additionally, U.S. Bancorp (NYSE:USB) benefits from the fact that discretionary services such as card payments and mortgages account for 40% of its $20.4 billion in net revenue as of the first nine months of 2024. The high percentage exposes it to sectors that typically do well in a high consumer spending and low interest rate environment.
Meridian Funds mentioned U.S. Bancorp (NYSE:USB) in its Q2 2024 investor letter. Here is what the fund said:
“U.S. Bancorp (NYSE:USB) provides banking, payments, investment, trust, and mortgage services to consumers, businesses, and institutions. We own the company because of its historically strong profitability and consistent dividend payouts. The stock underperformed in the quarter due to a downward revision in net interest income guidance, driven by the ongoing shift from non-interest-bearing deposits to higher-cost interest-bearing accounts. To help mitigate the lower net interest income, management is focused on expense control initiatives. We are holding our position in U.S. Bancorp as we monitor the trajectory of net interest income and the success of these expense reductions.”
6. The PNC Financial Services Group, Inc. (NYSE:PNC)
Number of Hedge Fund Investors In Q3 2024: 51
The PNC Financial Services Group, Inc. (NYSE:PNC) is one of the biggest regional banks in America. It had $565 billion in total assets as of September 2024. Like other mega banking players, it has had to walk a tightrope between interest income and expenses in the current era of high rates. For the first three quarters of 2024, The PNC Financial Services Group, Inc. (NYSE:PNC)’s interest income grew by 11.2% but its interest expenses grew by 37.5% and led to a 4.7% drop in net interest income. The bank also had to account for higher credit losses, which grew by 88% in Q3 to touch $243 million. These headwinds meant that for the first nine months of 2024, The PNC Financial Services Group, Inc. (NYSE:PNC)’s net income dropped by 10% to $4.3 billion. However, the bank is positioning itself for a low-rate environment that proves to be a boon for consumer lending. It is spending a whopping $500 million to open 100 new branches and overhaul 200 existing branches in the US which could add to its already sizable footprint in America.
Carillon Tower Advisors mentioned The PNC Financial Services Group, Inc. (NYSE:PNC) in its Q3 2024 investor letter. Here is what the fund said:
“The PNC Financial Services Group, Inc. (NYSE:PNC) contributed to performance as the company delivered strong financial results implying that its net interest income may have troughed. Financial results also implied an acceleration in loan growth at the end of the quarter; period-end loan growth vastly outpaced average loan growth throughout the quarter.”
5. Nu Holdings Ltd. (NYSE:NU)
Number of Hedge Fund Investors In Q3 2024: 54
Nu Holdings Ltd. (NYSE:NU) is a Brazilian bank with a presence in lucrative markets such as the US and Germany. It is one of the hottest plays in the industry due to an extreme focus on digital banking in Brazil which is a country dominated by conventional banks. In today’s tech-savvy environment, Nu Holdings Ltd. (NYSE:NU)’s lead in digital banking initiatives provides it with a sizable moat in one of the largest economies in the world. However, the high expectations built around its presence in Brazil and an intensive focus on growth as evidenced by a recent initiative to start offering telecommunications services in the country can create trouble for Nu Holdings Ltd. (NYSE:NU) down the road. This was evident after the bank’s third-quarter earnings which saw the stock slide by 14.8% over the next couple of days despite the fact that Nu Holdings Ltd. (NYSE:NU) $592 million in profit beat analyst estimates of $559 million. The shares slid as revenue of $2.9 billion didn’t beat estimates by much, which indicated to investors that perhaps growth is slowing down.
White Falcon Capital Management mentioned Nu Holdings Ltd. (NYSE:NU) in its Q3 2024 investor letter. Here is what the fund said:
“We sold half of our position in Nu Holdings Ltd. (NYSE:NU), which has been one of our highest IRR positions. We initiated a position in NU in the fall of 2022 at $4 per share and it is now trading at $14 per share. As has been communicated by us many times, good business and good managements tend to surprise to the upside. There is an option value in good quality businesses that mediocre businesses at cheap valuation just do not provide! That has been the case with NU where the actual business performance far exceeded our expectations. While we still believe NU has the potential to do well, the current risk-reward profile suggests that trimming our position might be a prudent move.”
4. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Investors In Q3 2024: 72
Wells Fargo & Company (NYSE:WFC) is a well-known American consumer bank with a presence all over America. As a result, it has had to balance its interest income and expenses throughout 2024 to account for higher deposit costs. Additionally, higher rates have also forced Wells Fargo & Company (NYSE:WFC) to increase its loan loss provisions to protect against loan defaults in a high-rate environment. In a trend that’s present across nearly all mega bank balance sheets, Wells Fargo & Company (NYSE:WFC)’s interest income growth is outpaced by its interest expenses. For the first nine months of 2024, the bank’s interest income grew by 10.2% while its interest expense grew by 45%. Consequently, Wells Fargo & Company (NYSE:WFC)’s net interest income dropped by 9.6% annually. However, on a positive note and as a sign of a potential turnaround, the bank’s credit loss provision dropped by 11% in Q3 to allow it to beat analyst profit estimates. Additionally, 32% of Wells Fargo & Company (NYSE:WFC)’s nine-month revenue came from activities such as investment banking and card fees which do well in a lower rate economy to add potential tailwinds to its future. However, the risk of regulations remains.
Wells Fargo & Company (NYSE:WFC)’s management shared key insights into its risk management strategies during the Q3 2024 earnings call. Here is what they said:
“Now let me update you on our strategic priorities, starting with our risk and control work, which remains our top priority. We continue to move forward with confidence and believe we have the right culture, team, discipline, and sense of urgency to complete the work that’s required. That includes what is required under the recent formal agreement we entered with the Office — of the Control of the Currency. We are also continuing to execute our other strategic priorities. We continue to build our credit card business and this past quarter, we launched two new co-branded credit cards with Expedia, which provide our customers a unique travel rewards program with instant discounts, enhanced perks and accelerated rewards. Our broader set of credit card products continue to be well received by both existing customers and customers new to Wells Fargo with nearly 2 million new credit cards accounts this year.”
3. Citigroup Inc. (NYSE:C)
Number of Hedge Fund Investors In Q3 2024: 88
Citigroup Inc. (NYSE:C) is an iconic American bank headquartered in New York City. Another mega player in the US banking industry, the bank depends on consumer spending and health for its hypothesis. Citigroup Inc. (NYSE:C)’s narrative has also struggled in 2024 due to a fine by the currency controller office for deficiencies in risk management. However, the bank benefits from a diversified income statement which is neatly divided across financial markets, services, wealth management, broader banking, and personal banking. For the nine months ending in September, Citigroup Inc. (NYSE:C)’s Services and Markets businesses accounted for 47% of its post-interest expense revenue. These businesses are dependent on a cyclical upswing in the economy that is typically ushered by high interest rates. On a broader note, full-year revenue guidance, share buybacks, and execution of its strategic transformation will drive Citigroup Inc. (NYSE:C)’s hypothesis.
During the Q3 2024 earnings call, Citigroup Inc. (NYSE:C)’s management commented on the impact of consumer spending on its revenue:
“Lower discretionary spending is impacting our retail services portfolio. However, we continue to see lower payment rates contributing to interest earning balances. In retail banking, we are growing our mortgage portfolio as the rate environment shifts, as well as growing overall loans. The US consumer dynamics remain remarkably consistent with prior quarters. Our customers are healthy, but more discerning in their spend with signs of stress isolated to the lower FICOs. We have maintained strong credit discipline and our card portfolios continue to perform very much in line with our expectations. In terms of capital, while uncertainty about the Basel III Endgame prevails, our capital position remains very robust and we ended the quarter with a CET1 ratio of 13.7%.”
2. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Investors In Q3 2024: 98
Bank of America Corporation (NYSE:BAC) is a sizable and well-diversified American bank that enjoys a nearly clean split between its net interest and noninterest income. For the nine months ending in September 2024, the bank earned 45% of its revenue through the latter line item. In an era where lower interest rates will impact bank revenues, the split offers Bank of America Corporation (NYSE:BAC) the ability to weather sharp revenue drops. Additionally, lower interest also benefits it in the form of lower deposit costs, as we covered in the introduction to this piece. Bank of America Corporation (NYSE:BAC)’s vast customer base of 66 million people also provides it with a wide moat in the industry. It is also a GSIB bank, which means that the government can help protect it against significant disruption. Bank of America Corporation (NYSE:BAC)’s investment banking division benefited from increased market activity in Q3 as its investment banking fees grew by 18% and sat at $1.4 billion.
Bank of America Corporation’s (NYSE:BAC) management commented on its investment banking division during the Q3 2024 earnings call. Here is what they said:
“On Slide 15, you see Global Banking results. This business produced earnings of $1.9 billion down 26% year-over-year as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 6%, driven by the impact of interest rates and deposit rotation.
In our global treasury services business, fees for managing the cash of clients continue to offset some of the NII pressure from higher rates. Investment banking had a strong quarter, growing fees 18% year-over-year to $1.4 billion, led by debt capital markets fees, mostly in leveraged finance and investment grade. We finished the quarter strong, maintaining our number three investment banking fee position. What began as a slow quarter this summer gained some momentum through September and the pipeline looking forward looks solid.”
1. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Investors In Q3 2024: 105
JPMorgan Chase & Co. (NYSE:JPM) is the largest private bank in the world in terms of total assets. The bank’s total assets sit at a whopping $4.1 trillion, and they are in themselves an unbeatable moat in the industry. JPMorgan Chase & Co. (NYSE:JPM)’s heft is complemented by a well-diversified income statement that relies on lending, capital markets, and other sectors to generate revenue. During the first nine months of the year, the bank earned 48% of its revenue through noninterest income. Within this line item, 30% of JPMorgan Chase & Co. (NYSE:JPM)’s revenue came from asset management and investment banking. These sectors respond favorably to lower interest rates, and consequently, they set the bank up well for a low-rate era. The tailwinds from investment banking were also evident following JPMorgan Chase & Co. (NYSE:JPM)’s third-quarter earnings which saw the shares rise 5% after investment banking fees jumped by 31%.
Another surprise during the quarterly report was an upward revision to annual net interest income guidance to $92.5 billion. Here’s what JPMorgan Chase & Co. (NYSE:JPM) management shared on this front during the Q3 2024 investor call:
“So we see the current 2025 consensus for NII ex-markets to be currently at 87%, which is obviously lower than it was at the conference earlier in the quarter. So we’re happy to see that move a little bit more in line to us. That still looks a little toppy, but it’s definitely in the ballpark. Now, that consists of, I already mentioned previously, that we sort of expect the NII trough sometime in the middle of the year. So you can kind of assemble the parts. You’ve got a fourth quarter run rate. You’ve got some sequential declines.
You’ve got a trough in the middle of the year, and you’ve got a rough ballpark for the full-year. So you can imagine that the trough probably is a little lower than those numbers and then to the extent that growth revolves, resumed in the back half of the year, both deposit balances and the ongoing tailwind of card revolve over that tailwind will be a little bit less than you might have otherwise thought I mean sorry a little bit less than it was this year, but still a tailwind. You know obviously the mix of those things will play out in different ways and as you point out who knows what the yield curve will wind up doing. But on our current assumptions, on the current yield curve, and remembering that we’re in the third quarter now, so we’re doing this kind of early, that’s what we think.”
JPM is a bank stock for the long term that hedge funds are diving head first into. While we acknowledge the potential of JPM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than JPM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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