In this article, we will examine the 10 Best Local Banks based on the number of hedge funds holding them.
A report by PwC predicts a revival in the US banking industry due to a pro-business policy expected from the Republican government. Key drivers for growth will be an increase in the demand for loans, steady securities business, and a lower benchmark rate. The estimated growth in net income from the overall banking sector is around 5.7%.
Deloitte predicts better economic growth in the US compared to 2024. Technology adoption can be a key driver for boosting output through efficiency in labor productivity. The CPI should also hover closer to the 2% market, prompting the central bank to lower interest rates. While lower lending costs may boost loan demand, a sticky deposit rate can hurt interest margins for banks. Deposit costs are expected to be at an elevated level of 2.03%, far above the 5-year average of 0.9%. This may create a pricing war between banks to procure more low-cost funds.
READ ALSO 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In
In 2024, the fee-based income for banks was driven by capital market activities. The trend is expected to continue as asset prices increase. Non-interest income as a percentage of average assets should reach a level of 1.5%, a figure that has not been breached in the last five years. The expense ratio for banks increased by 200 bps in 2024 to reach 60%. The ratio should hover around this level in the next few years. Credit quality may suffer marginally due to a growing loan book with delinquency rates expected to rise for credit card, auto, and commercial real estate loans. Larger banks with a diversified business are expected to perform better but regional banks have been strategically shuffling their book to obtain a more favorable product mix.
Regional Bank ETFs have generated returns of 5.82%, 11.25,% and 25.33% for 1-month, 6-month and 1-year tenors. The underlying banks have demonstrated resilience in a challenging business environment without affecting their capital adequacy and credit quality. Given this, we will take a look at some of the best bank stocks according to analysts.
A series of ATMs in a row, symbolizing the company’s 24/7 banking services.
Our Methodology:
For this article, we scanned through various credible sources and identified their consensus picks of local bank stocks from their recent articles. Next, we sorted these companies based on the number of hedge funds in Insider Monkey’s database that owned stakes in these companies. 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. Western Alliance Bancorporation (NYSE:WAL)
Number of Hedge Fund Investors: 35
Western Alliance Bancorporation (NYSE:WAL) operates through Commercial and Consumer segments and provides banking products and related services primarily in Arizona, California, and Nevada. Analysts at RBC Capital have lowered the price target of WAL from $109 to $105 but keep an Outperform rating for the stock. The ratings did not factor in the solid Q4 results delivered by WAL.
The Q4 EPS was $1.95 exceeding analyst’s expectation of $1.92. Western Alliance Bancorporation (NYSE:WAL)’s total revenue and revenue net of interest expectation also provided a positive surprise. The key focus of the bank has been to build its deposit base and improve liquidity, keeping the loan-to-deposit ratio around the 80s. Net interest income and non-interest income are expected to rise by 6-8% next year with Western Alliance Bancorporation (NYSE:WAL) looking to become a Category 4 bank. With a trailing 12-month EPS of $7.09, the current reflects a valuation of 12.6x, making it a reasonably priced stock.
9. Webster Financial Corporation (NYSE:WBS)
Number of Hedge Fund Investors: 37
Webster Financial Corporation (NYSE:WBS) provides a range of financial products and services to individuals, families, and businesses in the United States through its three segments namely Commercial Banking, HSA Bank, and Consumer Banking. The HAS segment offers health savings accounts, health reimbursement arrangements, flexible spending accounts, and commuter benefit services.
Webster Financial Corporation (NYSE:WBS) had a strong Q4, with total revenue and net interest income increasing 4.1% and 6.6% y-o-y, respectively. It has managed to reduce costs, achieving an efficiency ratio of 44.8%, compared to 43.04% a year ago. The loans and deposits book has been growing marginally but the allowance for bad loans has increased too, comprising 1.31% of total loans compared to 1.25% in Q4-23. Tier 1 and Total Capital ratios have improved from 11.62% and 13.72% to 12.01% and 14.20%, respectively. Webster Financial Corporation (NYSE:WBS) has solidified its balance sheet and has been growing steadily but it could continue to face pressure in maintaining the credit quality of its loan book.