The first nine months of 2024 were exceptional for the S&P 500 Index. The index rallied 21.4% during the period.

The primary drivers of the steady uptrend in the index were the clarity on the path of interest rates and robust economic growth, along with persistently cooling inflation numbers. Thus, almost all sectors within the S&P 500 Index rallied in the year-to-date (YTD) period. Among the top four was Financial Services, which appreciated nearly 19.9% during the period.

One of the largest constituents of the sector — banks — was in the spotlight as the Federal Reserve decided to cut interest rates. The S&P 500 Banks Industry Group Index was up nearly 17.4%. Of the banks that are part of the S&P 500 Index, BNY Mellon BK, M&T Bank Corp. MTB, Citigroup C, JPMorgan JPM and Fifth Third Bank FITB outperformed the index.

Here’s how these five banks performed in the year-to-date period.

Year-to-Date Price Performance

Image Source: Zacks Investment Research

Factors Aiding Banks’ Stellar Performances & Prospects

One of the key reasons for bullish investor sentiments was the Federal Reserve's decision of interest rate cuts. During the Sept. 17-18 FOMC meeting, the Fed lowered the interest rate by 50 basis points after more than four years. Currently, the Fed fund rates stand in the 4.75-5% range. This marks the end of an era of aggressive interest rate hikes intended to curb persistent inflation. The central bank also indicated two more rate cuts this year, which will bring the Fed funds rate down to 4.4% in 2024.

Investors see this rate cut as a big support to the economy with the expectation of a soft landing, where the Fed's aggressive tightening cycle ends with inflation falling to the 2% target without a significant economic downturn.

Secondly, the imminent recession risk is largely gone and the U.S. economy continues to show resilience. The country’s real GDP increased to 2.5% in 2023 from 1.9% in 2022.

Per the Fed’s latest Summary of Economic Projections, the real GDP is expected to register a growth rate of 2% this year. This is a downward swing from the prior expectation of a 2.1% increase. With this, the chances of the U.S. economy’s soft landing are high.

Driven by these developments, investors continue to be bullish on bank stocks. As the Fed cuts the interest rates, funding costs will gradually stabilize and start declining, thus supporting NII. Lower rates will also result in a gradual improvement in banks’ asset quality as borrowers repay loans. The lending scenario, which has been subdued of late, is expected to improve as the lower rate ignites demand for loans.

However, banks are not fully out of the woods. The exposure to commercial real estate (CRE) loans is a major concern. This is turning out to be a stress on their asset quality. The major rating agencies, including S&P Global Ratings, Fitch and Moody’s, have been flagging exposure to CRE loans as a key headwind for the industry. The slump in commercial property values will likely hurt regional banks to some extent.

Yet, investors are seeing interest rate cuts and decent economic growth as major positives for the industry than the CRE exposure woes at present. Driven by these favorable factors, bank stocks are expected to keep performing solidly in the near term.

Banks Perform Impressively on Robust Fundamentals

BNY Mellon: Operating in 35 countries, BNY Mellon provides various products and services to individuals and institutions. Its global client base consists of financial institutions, corporations, government agencies, endowments and foundations and high-net-worth individuals.

Higher interest rates will support BNY Mellon’s top-line growth. While the company’s NIR and NIM declined in 2020 and 2021, both rebounded solidly after that. NIR recorded a five-year (ended 2023) CAGR of 3.8%. With the Fed rate cut, NIR and NIM are likely to improve over time as funding costs stabilize.

The company has been trying to gain a foothold in foreign markets and is undertaking several growth initiatives (including launching new services, digitizing operations and making strategic buyouts). In the first half of 2024, non-U.S. revenues contributed 35% to total revenues. The company’s international revenues are expected to continue improving as the demand for personalized services rises across the globe.

After the clearance of the 2024 stress test, the company hiked its quarterly cash dividend by 12% to 47 cents per share. In April 2024, the company announced a new share repurchase program worth $6 billion. It will be effective once the prior buyback plan, which has approximately $0.81 billion worth of buyback authorization left as of June 30, 2024, is fully utilized. The company expects to return 100% or more of its earnings to shareholders in 2024 after having returned 123% last year.

BK currently carries a Zacks Rank #2 (Buy).

M&T Bank: Headquartered in Buffalo, N.Y., the bank has shown remarkable revenue growth by achieving a CAGR of 10.2% over the past five years (2018-2023). Although the metric declined in the first half of 2024, higher NII driven by a favorable lending environment and expected rate cut beginning September, along with the company’s efforts to bolster non-interest income, will support the top-line growth. Additionally, the company’s operations as a solid and sustainable regional bank franchise with a footprint that spans six Mid-Atlantic States, as well as Washington, D.C. is another positive.

M&T Bank is well-positioned to grow via acquisitions. In 2022, it bought People's United for $8.3 billion, marking one of the major acquisitions by the company. The acquisition expanded the company’s geographical footprint, given People's United’s large network of branches. Product and balance-sheet diversification stemming from such buyouts will likely support the company’s financials.

In May 2024, the company hiked its quarterly dividends by 4% to $1.35 per share, following an 8.3% increase in February 2023. As of June 30, it had $1.2 billion of authorization remaining from the 2022 share repurchase plan of $3 billion. Management expects to repurchase $200 million worth of shares per quarter in the second quarter and the third quarter of 2024. Given the company’s consistent performance and strong liquidity profile, its capital distributions seem sustainable.

MTB currently carries a Zacks Rank #3 (Hold).

Citigroup: As a globally-diversified financial services holding company, Citigroup continues to increase its fee-based business mix and shrink non-core businesses. In sync with this, the company announced the completion of major actions to simplify its operating structure and improve performance that were announced in September 2023.

As part of this initiative, C eliminated the workforce and trimmed management layers. These efforts will make the decision-making process swifter, drive increased accountability and enhance focus on clients.

The company is also on track with its major strategic action to exit the consumer banking business in 14 markets across Asia and the EMEA. The bank has divested businesses in nine markets, including Australia, Bahrain, India, Malaysia, the Philippines, Taiwan, Thailand, Vietnam, Indonesia and China regions.

In addition to China, the previously announced wind-down of the company’s consumer banking businesses in Korea and overall presence in Russia are in progress. Citigroup is preparing for a planned IPO of its consumer, small business and middle market banking operations in Mexico and restarted the sales process for the consumer banking business in Poland. Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke fee income growth.

In July 2024, the company hiked its quarterly dividend by 6% to 56 cents per share. The company plans to repurchase $1 billion of shares in third-quarter 2024. Given the current challenging operating backdrop, the company will continue to assess share repurchases on a quarter-to-quarter basis.

C currently carries a Zacks Rank #3.

JPMorgan: The largest U.S. bank, JPMorgan, is expected to keep benefiting from higher rates, loan growth, strategic acquisitions, business diversification efforts, strong liquidity position and initiatives to expand the branch network in new markets.

In May 2023, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal continues to support the company’s financials immensely.
JPM is expanding its footprint in new regions despite the proliferation of mobile and online banking options. In February, the company announced plans to open more than 500 new branches by 2027. This initiative will solidify its position as the bank with the largest branch network and a presence in all 48 states in the United States. The company is also committed to renovating 1,700 existing locations by 2027-end to serve its customers better.

JPMorgan remains focused on acquiring the industry's best deposit franchise and strengthening its loan portfolio. Despite a challenging operating environment, deposits and loan balances have remained strong in the past several years. As of June 30, 2024, the loans-to-deposit ratio was 55%. Though a potential economic slowdown and high rates will hamper wholesale loan demand to some extent, demand for consumer loans (specifically credit cards) is expected to remain solid.

Following the clearance of the 2024 stress test, the company announced plans to increase its quarterly dividend by 8.7% to $1.25 per share while authorizing a new share repurchase program of $30 billion, effective Jul 1, 2024. Earlier in February, the company announced a 9.5% hike in quarterly dividends, which followed a 5% increase last year. Management expects the pace of share buybacks to be modest in 2024 after having repurchased shares worth almost $9.9 billion in 2023.

JPM currently carries a Zacks Rank #3.

Fifth Third Bancorp: With assets of $213.3 billion as of June 30, 2024, Cincinnati-based Fifth Third Bancorp has 1,070 full-service banking centers in 11 states throughout the Midwestern and Southeastern regions of the United States.

The company expanded over the years through various strategic acquisitions. It completed the acquisition of Big Data LLC in 2023, adding national healthcare revenue cycle capabilities to its operations. This will, thereby, advance its digital payments and managed services offerings. It also acquired an embedded payment platform, Rize Money. The acquisitions of Dividend Finance in 2022, Provide in 2021 and Coker Capital in 2018 expanded commercial verticals.

Fifth Third focused on treasury management and wealth and asset management business in the past few quarters to bolster its non-interest income, which is less volatile compared with spread income.  In May 2024, in collaboration with Bottomline, Fifth Third launched Enhanced Payables — a new payment platform powered by the latter’s business payments network, Paymode-X. Further advancing its innovation in the money movement landscape, Fifth Third's embedded payments platform, Newline, entered into a collaborative agreement with Trustly in September. Through such strategic collaborations, the bank anticipates commercial payments to be a $1 billion business in the next five years. This will eventually boost the company’s non-interest income growth over time.

In September 2024, the company announced a 5.7% rise in quarterly dividend to 37 cents per share. At present, the company has a dividend payout ratio of 40%. It also has a share repurchase plan in place. On July 22, 2024, the company initiated an accelerated share repurchase agreement with a counterparty, through which it paid $200 million on July 23, 2024, to repurchase shares of its outstanding common stock. The company bought back shares of its common stock under the plan of 100-million shares announced on June 18, 2019. As of June 30, 28.6 million shares remain available under the authorization. Going forward, the company expects to repurchase $200 million worth of shares for each remaining quarter of 2024. Such efforts will enhance shareholder value in the long term.

FITB currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report

Citigroup Inc. (C) : Free Stock Analysis Report

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The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report

M&T Bank Corporation (MTB) : Free Stock Analysis Report

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