In this piece, we will take a look at the ten best local bank stocks to invest in now.
As investors shift their focus from artificial intelligence to the labor market and its impact on potential interest rate cuts, the banking industry of 2024 is quite different from the one in 2021. Interest rates are at a 24 year high in America as of early September, which means that not only do the costs of borrowing money increase for consumers but banks also have to carefully monitor their loan portfolios to ensure liquidity and manage insolvency risks.
One consequence of this has been a growth in private capital, which covers loans made to firms by non banking entities. According to data from the International Monetary Fund (IMF), the private credit market crossed a whipping $2.1 trillion in 2023 through its assets and capital commitments. 75% of this was in the US as investors such as pension funds and others drove to funds that offered higher returns while corporate borrowers flocked to private lenders due to the relatively simpler process of acquiring capital and relaxed risk requirements when compared to banks.
In fact, private credit is one of the best performing investment vehicles when it comes to returns according to the IMF. The fund uses December 2000 as a base value of 100 to show that as of June 2023, private credit was up to almost 800 points. In comparison, the flagship S&P index, which was also assigned an index value of 100 for December 2000, was up to roughly 460 points by June 2023, while global stocks delivered the least returns as they sat at 400 points.
The IMF believes that while the risks from this shift from local banks to private capital are not immediate, they are still important particularly due to the opacity of private capital. Private borrowers are riskier than those who borrow from banks. For instance, while the debt to operating income ratio of private borrowers is roughly 4.75, the median firm size is roughly $500 million. On the other hand, firms that rely on investment grade bonds have a median value of $16 billion and a debt to operating income ratio ranging between 2.8 to 3.6.
Shifting gears, the growth in private capital isn’t the only disruption that banks are facing. While high interest rates create the opportunity for banks to earn more through interest income, they also increase interest expenses. In fact, according to research from S&P Global, the banking sector will see some benefits from the higher rates this year as the aggregate efficiency ratio (non interest expenses/revenue) can sit at 60.30 this year for a three point gain over 2023’s 57.25. However, this might be the only good news in store. This is because the sector’s net interest margin, return on average assets (ROAA), and return on average equity (ROAE) are all expected to drop in 2024. In 2023, the three respective metrics were 3.22, 1.09, and 11.52, while in 2024, they are expected to sit at 3.18, 0.97, and 11.52.
Additionally, two other ways in which the banking industry has evolved in today’s era of high interest rates are through growth in competition for deposits and the corresponding high deposit costs. Not only did the high rates start to fully make their mark in Q4 2023 as deposits grew by 1.4% after six consecutive quarterly declines, but the difference between the Fed funds rate and the rate paid to depositors also dropped in Q4. This was because banks enticed customers by increasing their deposit costs, and the difference between the two rates had sat at roughly 3.2% in Q2 2023 and dropped to roughly 2.9% in the fourth quarter. The S&P believes that by 2026, this should sit at roughly 1% as the Fed funds rate drops to a little above 2%.
The increasing competition for deposits in banks that spurred the smaller gap has also caused large drops in the banking industry’s non interest deposits. As of 2023 end, non interest deposits accounted for 21.8% of the US banking industry’s total deposits a sizeable drop over the 28.9% figure for 2021. This fall came when non interest bearing deposits dropped by 28% over the past two years while interest bearing deposits grew by 5%. Keep in mind that the growth figure for the interest bearing deposits is lower due to their larger volume. Looking at the future, the banking industry’s net interest margin is expected to grow to 3.26 and 3.35 in 2025 and 2026 when the deposit beta falls to at least 27%.
Finally, the boon in internet usage and the accompanying growth in consumer electronics and personal computing is also impacting the banking industry. As per McKinsey, 60% of US banking consumers under the age of 70 are using digital channels for their wealth management. At the same time, some of the richest banking consumers, i.e. those aged above 70 are also increasing their use of digital banking products. This usage has grown by 5% within this age group, with the broader trend allowing banks the ability to bring their cost to income ratios below 25% and cost to asset ratios below 50%. In short, digital banking is offering banks the ability to become quite light operationally.
With these details in mind, let’s take a look at the best local bank stocks to buy according to hedge funds.
A banker closely examining a document while seated at his desk.
Our Methodology
To make our list of the best local bank stocks to buy according to hedge funds, we ranked the 40 most valuable regional US banks in America in terms of market capitalization by the number of hedge funds that had bought their shares in Q2 2024 and picked out the top stocks.
For these stocks, we have also mentioned the number of hedge fund investors. 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. Bank OZK (NASDAQ:OZK)
Number of Hedge Fund Holders In Q2 2024: 34
Bank OZK (NASDAQ:OZK) is one of the oldest regional banks in the US and is headquartered in Little Rock, Arkansas. While it has a sizeable balance sheet with $34.4 billion in total assets, Bank OZK (NASDAQ:OZK)’s stock is down by 19% year to date. While this might appear to be surprising on the surface as bank stocks have held off against losses (the KBW banking index is flat year to date), Bank OZK (NASDAQ:OZK) is heavily exposed to one of the most tumultuous markets in the US. This is the real estate market, and as of June 2024, $21.6 billion of the bank’s $28.6 billion loan portfolio was for real estate loans. This accounts for 75.5% of the overall portfolio, and its overall asset base is further complicated by the fact that non-interest bearing deposits account for a small 13% of Bank OZK (NASDAQ:OZK)’s total asset base. This means that in a high interest era, the bank’s interest rate costs remain high as well. However, if the Federal Reserve cuts interest rates and the real estate sector starts to pick up steam, then Bank OZK (NASDAQ:OZK) could see its high exposure to real estate pay out well.
Diamond Hill Capital mentioned Bank OZK (NASDAQ:OZK) in its Q2 2024 investor letter. Here is what the fund said:
“Shares of regional banks Live Oak Bancshares and Bank OZK consolidated some of late 2023’s gains tied to investors’ expectations the Fed would begin cutting rates in 2024 — which would relieve deposit pricing pressure and commercial real estate stress. As investors have adjusted expectations for fewer rate cuts in 2024, shares of both companies have declined in sympathy.”
9. Comerica Incorporated (NYSE:CMA)
Number of Hedge Fund Holders In Q2 2024: 38
Comerica Incorporated (NYSE:CMA) is a Texas based bank that operates in its home state, California, Florida, and other American states. Like Bank OZK, the bank’s shares are also down year to date and they have lost roughly 2% so far. This is partly due to the fact that $26 billion of its $51 billion in total loans are to commercial customers, which has led to a drop in its net interest income. Additionally, Comerica Incorporated (NYSE:CMA) also holds significant money market and interest bearing checking deposits, which have seen their interest payouts grow during 2024 to further stress its income statement. While the bank could have helped buffer this through non interest bearing deposits, these dropped by $1 billion sequentially to $25.3 billion in Q2 2024. Comerica Incorporated (NYSE:CMA) hasn’t been helped by the fact that it lost the Treasury Department’s Direct Express Mastercard program in Q2, which removed a key non interest income stream from its income statement right at the time when its overall costs were rising and potentially lower interest rates are expected to stress its interest income.
Comerica Incorporated (NYSE:CMA)’s management commented on the loss of the Direct Express business during the Q2 2024 earnings call:
“Before moving to the outlook, as indicated on Slide 14, we recently received preliminary notification from the Fiscal Service that Comerica Bank was not selected to continue serving as the financial agent for the Direct Express prepaid debit card program following the expiration of our contract early next year. This process remains fluid as contract negotiations are not yet final, but at this time, we do not expect that Comerica Bank will retain the business long-term. As detailed on the slide, we’ve recognized noninterest income in card fees, but that is generally offset by expenses associated with managing the program.
The financial value has been in the noninterest-bearing deposit balances related to monthly benefits funded on the cards, which have grown over time and averaged $3.3 billion in the second quarter. As we have discussed in the past, there are various potential scenarios with regards to the timing and mechanics of the deposit transition and we expect more detail in the coming quarters as terms become final. However, our experience with this program leads us to believe this transition maybe longer than shorter and we do not currently anticipate an impact to 2024 deposit balances, noninterest income or expenses. While we have been honored to manage this important program, we see this as an opportunity to refocus and reprioritize resources towards targeted deposit strategies more in line with our core relationship operating model.”
8. KeyCorp (NYSE:KEY)
Number of Hedge Fund Holders In Q2 2024: 38
KeyCorp (NYSE:KEY) is a consumer and commercial bank headquartered in Cleveland, Ohio. When compared to some other banks on our list, it has somewhat of a diversified loan portfolio with lower exposure to the tricky commercial real estate industry. As of Q2 2024, just $17 billion of KeyCorp (NYSE:KEY)’s $107 billion in total loans were to commercial real estate, which removes a large portion of risk from its lending. Roughly half, or $53 billion were to businesses and industrial firms, which typically have sizeable asset bases for worst case recovery and robust cash flow statements and debt management to continue making regular payments. The loan diversity helped KeyCorp (NYSE:KEY) in its Q2 when an improved economic environment allowed the bank to decrease its loan and lease losses for consumers by $24 million which nearly mitigated the impact of a $29 million jump in the same metric for the commercial loan segment. KeyCorp (NYSE:KEY) has also been aiming to streamline its balance sheet by raising capital by selling a minority stake to Scotiabank.
This deal should bump KeyCorp (NYSE:KEY)’s CET1 ratio to 12.9%, and before it took place, here’s what management had to say for this ratio during the Q2 2024 earnings call:
“This quarter, our Common Equity Tier 1 ratio improved by roughly another 20 basis points to 10.5%. Our marked CET1 intangible capital ratios also improved. As reported a few weeks ago, we have received the results of the Fed’s stress test or D-Fest, which implied a preliminary stress capital buffer for Key of 3.1%, which is up 50 basis points from the SCV we received in 2022. I’ll make just a few comments. First, even under this preliminary buffer, we have plenty of excess capital. Our 10.5% CET1 ratio compares to what would be a new 7.6% implied minimum. So the results continue to illustrate our strong capital position. Secondly, we, like others in our industry, don’t have insight into the Fed’s models. The Fed’s modeled loan losses for Key, particularly for our commercial real estate and first-lien mortgage portfolios, are inconsistent with our internally run stress tests”
7. Webster Financial Corporation (NYSE:WBS)
Number of Hedge Fund Holders In Q2 2024: 42
Webster Financial Corporation (NYSE:WBS) is a Connecticut based regional bank that provides consumer, commercial, and other banking services. Like KeyCorp, it also has a diversified loan portfolio which has a total value of $51.5 billion. Within this, $14.1 billion is from commercial real estate, $9.8 billion comes through consumer loans and another $16.7 billion is from non mortgage commercial loans. Additionally, Webster Financial Corporation (NYSE:WBS) has also efficiently managed its deposit base by not relying on a single category for a large chunk of liabilities. Out of the bank’s $62 billion in deposits, $9.9 billion are non interest bearing demand deposits, which help reduce its interest costs. Another $1 billion are time deposits that are due for maturity in 2025 and beyond, and Webster Financial Corporation (NYSE:WBS) also benefits from $8.5 billion in health savings deposits, which are among the few of their kind in the banking industry. The HSA accounts are specialized entities that enable businesses and consumers to take tax advantages to manage their and their employees’ healthcare needs, and given the growing elderly population in America, they could offer Webster Financial Corporation (NYSE:WBS) a key competitive edge.
Webster Financial Corporation (NYSE:WBS)’s management also shared key details for its exposure to the troubled commercial real estate sector during the Q2 2024 earnings call:
“There were no significant changes to the performance characteristics of our rent regulated multifamily portfolio, where our conservatively underwritten portfolio’s performance has held up really well, as you can see by consistently low levels of classified and non-accrual loans. The portfolio is granular, has conservative LTVs and debt service coverage ratios was underwritten to property cash flows at the time of origination and has limited maturities in the next two years. For office, we also have a portfolio that is granular with conservative underwriting characteristics. As the sector continues to be challenged, we did have several loans moved to non-accrual, which was the primary driver of the increase in our overall NPLs this quarter.
Office balances were $950 million at the end of the second quarter, down from just over $1 billion last quarter. In our office portfolio, approximately 75% of the remaining loan balances have some form of credit enhancement which adds significant value in mitigating potential losses. A few important comments to make as it relates to overall credit. Even with the negative risk rating migration, our NPL ratio, classified loan ratio and annualized charge-off rate in the quarter all remain proximate to or better than pre-pandemic Webster levels, meaning these metrics remain consistent with a more normalized credit environment. As we continue to aggressively and proactively manage and review the portfolio, after the material change in the environment or unforeseen surprises, we don’t see this rate of upgrade migration continuing in Q3.”
6. Truist Financial Corporation (NYSE:TFC)
Number of Hedge Fund Holders In Q2 2024: 42
Truist Financial Corporation (NYSE:TFC) is a diversified bank that provides commercial, consumer, as well as wealth management services. This provides it with revenue streams that can end up countering each other in different economic climates. For instance, while Truist Financial Corporation (NYSE:TFC)’s general consumer customers might not fare too well when the economy is slow and inflation is rising, its wealthy customers can increase the demand for the bank’s services. This was also the case during Q2 2024, when Truist Financial Corporation (NYSE:TFC)’s non interest income (a key aspect of any bank’s hypothesis given today’s environment and expected future trends) took a massive $6.7 billion hit due to securities losses. However, Truist Financial Corporation (NYSE:TFC)’s wealth management, investment banking, deposit service charges, and other income streams helped stem the bleeding to a negative $5.2 billion for Q2 and $3.7 billion for H1 2024. Looking ahead, investors should be on the watch out for Truist Financial Corporation (NYSE:TFC)’s net interest income to gauge the direction of its stock.
Ariel Investments mentioned Truist Financial Corporation (NYSE:TFC) in its Q4 2023 investor letter. Here is what the fund said:
“After the merger of BB&T and SunTrust formed Truist in 2019, management has prioritized simplifying the organization and reducing expenses to optimize profitability. After successfully selling a portion of the insurance business, TFC is now considering selling the remaining stake. While we take no definitive view on the likelihood of a sale, we believe this would be a positive catalyst for the company. TFC could leverage the deal to strengthen its adjusted capital profile, improve margins as well as accelerate its investment in technology. Meanwhile, the company is trading at a significant discount relative to our estimate of its intrinsic value.”
5. U.S. Bancorp (NYSE:USB)
Number of Hedge Fund Holders In Q2 2024: 43
U.S. Bancorp (NYSE:USB) is one of the biggest regional banks in America as evidenced by its sizeable employee count of 70,000 and total assets of a whopping $663 billion. Both of these provide the bank with all the tools that it needs to weather most economic storms, a fact that’s evident through the stock’s 24% gain over the past twelve months. Additionally, in a US banking industry that’s looking forward to a slowdown in interest income in the future, U.S. Bancorp (NYSE:USB) appears to have positioned itself well through its fee generating business. As of H11 2024, $5.5 billion of the firm’s $13.5 billion in net revenue was from fees, payments, and other areas which provide a good source of diversification to U.S. Bancorp (NYSE:USB)’s income statement. At the same time, this also leaves it vulnerable to economic downturns, especially since roughly $2.4 billion of the $5.5 billion non interest income is from discretionary spending sources such as merchant fees and card revenue. U.S. Bancorp (NYSE:USB) is also a market leader in several American states when it comes to deposit shares, leading to a well capitalized balance sheet that has also led to an exemption of Capital 2 requirements for it until 2024 end.
Aristotle Capital shared three key bullish indicators for U.S. Bancorp (NYSE:USB) in its Q4 2023 investor letter:
“Catalysts we have identified for USB, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:
- Enhanced revenues and cost-savings through expense synergies following the recent acquisition of Union Bank;
- Continued balanced and relatively low-risk loan growth coupled with deposit share gains in most geographies in which it operates;
- Improvement in return-on-assets through both efficiency gains and a more robust product offering; and
- Increased returns to shareholders following a near-term period when, as a result of enhanced regulatory requirements due to higher total assets from the Union Bank acquisition, share buybacks were paused.”
4. First Citizens BancShares, Inc. (NASDAQ:FCNCA)
Number of Hedge Fund Holders In Q2 2024: 46
First Citizens BancShares, Inc. (NASDAQ:FCNCA) is a North Carolina based regional bank. It is one of the hottest stories in the US banking industries, due to the mini banking crisis in the US that shook Wall Street in 2023. The crisis saw some of the biggest local US banks fail as high bond yields and inadequate loss provisions left them unable to meet their commitments. This saw First Citizens BancShares, Inc. (NASDAQ:FCNCA) swoop in and buy Silicon Valley Back, and the success of the acquisition coupled with the outlook for net interest income and margins are the keys to its hypothesis. Even as US banking growth is expected to slow down soon, the addition of SVB into First Citizens BancShares, Inc. (NASDAQ:FCNCA)’s portfolio will enable the bank to grow – a fact that’s also reflected in its share price gains of 43.4% over the past 12 months to lead the KBW regional banking index by, well, 43.3 percentage points. However, First Citizens BancShares, Inc. (NASDAQ:FCNCA)’s shares trade at a premium of 27.6% over its shares, which raises the question of whether there’s any more room for the stock to grow. While the stock trades at $1,898.10, the average of 14 analyst share price targets is $2,287, implying that if First Citizens BancShares, Inc. (NASDAQ:FCNCA) performs well on the dual fronts of interest income and cost control then the stock might have some more juice left in it.
Artisan Partners mentioned First Citizens BancShares, Inc. (NASDAQ:FCNCA) in its Q4 2023 investor letter. Here is what the fund said:
“First Citizens was our top overall contributor in 2023. Headquartered in Raleigh, North Carolina, and one of the largest family-controlled banks in the US, First Citizens was a big winner from its acquisition of the failed Silicon Valley Bank. First Citizens purchased $72.1 billion in loans at a deeply discounted price of $16.5 billion. The transaction adds scale, increases geographic diversity and is financially attractive with downside protections from a loss-sharing agreement with the FDIC. First Citizens is now one of the top-15 largest US banks. The bank is run by and almost fully controlled by CEO Frank Holding and his family members. They have significant ownership, aligning their interest with minority shareholders like us. They’ve done an admirable job of growing the bank by keeping a strong capital and liquidity profile that allows for opportunistic M&A during times of market stress, like we just experienced in March. In the global financial crisis, First Citizens used its position of strength to acquire when others could not, and during the COVID-induced stress of 2020, it flexed its muscles again with the acquisition of CIT at a great price.”
3. First Horizon Corporation (NYSE:FHN)
Number of Hedge Fund Holders In Q2 2024: 47
First Horizon Corporation (NYSE:FHN) is a Tennessee based bank that provides consumer banking, wealth management, brokerage, and other associated services. The bank’s hypothesis is dependent quite a lot on its net interest income due to its modest alternative income sources. During Q2, First Horizon Corporation (NYSE:FHN) earned $629 million in net interest income, while its non interest income sat at $186 million. The latter figure itself is dependent on market perception of interest rates, since out of this figure, $40 million – or 21.5% – came through fixed assets. These assets dropped in value in H1 2024 as the market shifted its Fed interest rate cut expectations forward. First Horizon Corporation (NYSE:FHN)’s dependence on NII made a 3% share price drop following its Q2 earnings unsurprising, as the bank cut its 2024 guidance for metric. Now, it expects 2024 NII to range between 0% to -2%, down from an earlier 1% to 4% growth, and the cut came at a time when First Horizon Corporation (NYSE:FHN)’s net income dropped by 38% annually in Q2. This further worried investors about costs increasing at a time when income was dropping.
Scout Investments mentioned First Horizon Corporation (NYSE:FHN) in its Q4 2023 investor letter. Here is what the fund said:
“First Horizon was the third-largest contributor. This bank holding company rose as the industry rallied due to the investor sentiment shift toward a soft economic landing or continued growth. A soft economic landing, should it occur, means that banks are likely to experience fewer loan losses than in a recession and steadier interest rate margins if extreme interest rate volatility is dampened.”
2. Citizens Financial Group, Inc. (NYSE:CFG)
Number of Hedge Fund Holders In Q2 2024: 47
Citizens Financial Group, Inc. (NYSE:CFG) is a Rhode Island based consumer and commercial banking firm. Additionally, the firm also has a private banking division which allows it diversification for its deposit base and income. Citizens Financial Group, Inc. (NYSE:CFG) has a diversified loan portfolio as well, with exposure to commercial real estate limited to 20% as of Q2. An additional 31% of its loans are to non real estate commercial entities and industrial firms, which are more likely to make timely payments than consumer borrowers. However, Citizens Financial Group, Inc. (NYSE:CFG) also holds $11 billion in education loans, and these might see trouble depending on their type if the US government’s student borrower forgiveness programs are expanded. Unlike some other banks though, Citizens Financial Group, Inc. (NYSE:CFG) enjoys the advantage of having 21% of its deposits being non interest paying demand deposits which expands its ability to earn revenue at a time when the US banking industry is expected to face higher costs and dropping interest income. Additionally, its CET1 ratio of 10.7% allows Citizens Financial Group, Inc. (NYSE:CFG) the ability to boost its shares by having room to make buybacks.
Citizens Financial Group, Inc. (NYSE:CFG)’s management shared key details for its private bank during the Q2 2024 earnings call:
“Finally, we’re building a premier private bank, and that is going very well and gaining momentum.
We’re growing our client base and now have about $4 billion of attractive deposits, a $1.6 billion increase from the prior quarter, with roughly 30% non-interest bearing. Also, we are now at $1.4 billion of loans and continuing to grow. We recently opened private banking offices in Mill Valley, California and Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Citizens Wealth Management business as the center piece of that effort. We added two exceptional asset management teams in the second quarter, one from San Francisco and the other from Boston, bringing the total private bank AUM to $3.6 billion, well on our way to hit our $10 billion target by the end of 2025. Importantly, our private bank revenue increased 68% to about $30 million in the second quarter, and we are on track to break even on the bottom line later this year.”
1. The PNC Financial Services Group, Inc. (NYSE:PNC)
Number of Hedge Fund Holders In Q2 2024: 51
The PNC Financial Services Group, Inc. (NYSE:PNC) is a Pennsylvania based regional bank that provides asset management, commercial, retail, and institutional banking services. Its heft, as evidenced by a whopping $561 billion in total assets provides the bank not only with the stability to weather downturns but also the agility to prepare itself for the future. The PNC Financial Services Group, Inc. (NYSE:PNC) is doing just that, as it ended the second quarter with a liquidity coverage ratio of 119% which was 19 percentage points higher than the requirement of 100%. This provides the bank with the ability to offer more loans right when rates are dropping, in order to boost its interest income while other banks focus on non interest income. The PNC Financial Services Group, Inc. (NYSE:PNC) aims to do just this, and it is currently aiming to deploy this capital in the second half of 2024 and 2025. The bank also bolstered its cash position in Q2 by marking a $745 million gain through monetizing its stake in Visa.
The PNC Financial Services Group, Inc. (NYSE:PNC) ‘s management also shared key details for its deposit base during the Q2 2024 earnings call when it revealed:
“Average deposits declined $3 billion or 1% reflecting seasonally lower corporate balances. Regarding mix, consolidated non-interest bearing deposits were 23% of total deposits in the second quarter, down less than 1 percentage point from the first quarter.
Additionally, average non-interest bearing deposits had the smallest dollar decline in the second quarter of 2024 since the Fed began raising rates in 2022, which gives us confidence that the non-interest bearing portion of our deposits has largely stabilized. And our rate paid on interest bearing deposits increased by only 1 basis point during the second quarter to 2.61%. We believe our rate paid on deposits is approaching its peak level, but we do expect some potential to [drift] (ph) higher as interest rates remain elevated.”
PNC tops our list of the best hedge fund local bank stocks. But our conviction lies in the belief that some 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 PNC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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