This year started on a strong note for the U.S. economy, driven by optimism over potential faster interest cuts by the Federal Reserve, a strong labor market, rising consumer spending, and technological developments. Nonetheless, the optimism related to interest rate cuts gradually faded as inflation continued to be persistent and did not come down as expected. This led to uncertainty regarding the pace of rate cuts. Though the Fed has reduced interest rates by 100 basis points since September, it has hinted at fewer cuts for 2025.
The rate cut spree announced by the Fed has kept banking stocks in focus. As interest rates keep decreasing, it will lead to a steady rise in consumer and commercial loan demand. Further, funding/deposit costs will gradually stabilize and then decline. These factors will continue to drive banks’ net interest income (NII) and net interest margin (NIM). Moreover, the U.S. presidential election results fueled the optimism around banks on anticipated tax cuts, favorable regulations and expansionary fiscal measures, stimulating economic growth.
With the new administration soon in place, deal-making activities are expected to soar in 2025 after witnessing a strong resurgence this year. Hence, banks are expected to record a decent rise in revenues, and NIM is also likely to expand. Against this favorable backdrop, investors can bet on The Bank of New York Mellon Corp. BK, Northern Trust Corporation NTRS and Stock Yards Bancorp, Inc. SYBT as these are well-poised for growth next year.
Banks have been focusing on AI and technology to enhance their client experience and expand their presence online to capture a rising mobile banking population. Also, strategic buyouts and collaborative efforts to deepen global presence and diversify revenue streams will further bolster fee incomes. Thus, in 2025, banking firms are likely to benefit from their efforts to boost NII and fee income.
On the other hand, banks’ mortgage banking income is less likely to improve in 2025 as mortgage rates are expected to remain elevated. Now, moving on to banks’ asset quality performance, weakness is likely to persist in certain portfolios, including credit cards, auto and commercial real estate loans. Despite these concerns, 2025 will likely turn out to be a good year for banks.
We have picked the abovementioned three banking stocks with the help of the Zacks Stock Screener. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy). Further, they have rallied more than 20% this year and have a market capitalization of $2 billion or higher. You can see the complete list of today’s Zacks #1 Rank stocks here.
Year-to-Date Price Performance
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BNY Mellon, based in New York, is a financial services company offering various products and services to individuals and institutions.
BK’s net interest revenues witnessed a compound annual growth rate (CAGR) of 3.8% over the past five years (2018-2023), driven by higher interest rates. Moreover, NIM improved to 1.25% in 2023 from 0.97% in 2022. The uptrend for both metrics continued during the first nine months of 2024, attributed to stabilizing funding costs. The momentum is likely to continue as rate cuts drive funding cost pressure downward alongside rising loan demand.
BNY Mellon’s efforts to strengthen its presence globally by launching new services and opportunistic buyouts will aid its financials. Last month, the company acquired Archer to enhance its managed account solutions. In September, it announced plans to launch Alts Bridge, boosting its alternative offerings. BK’s international revenues are expected to grow, driven by rising demand for personalized services globally. As of Sept. 30, 2023, non-U.S. revenues accounted for 35% of its total revenues.
The bank has hiked dividends four times in the last five years with an annualized growth of 8.9%. Also, in April 2024, the company announced a new share repurchase program worth $6 billion. As of Sept. 30, 2024, roughly $6.08 billion worth of authorization remained available. Its earnings strength and solid balance sheet will keep capital distributions sustainable.
BK, with a market cap of $57 billion and a Zacks Rank #2, has risen 50.5% this year. The Zacks Consensus Estimate for its 2024 and 2025 earnings has been revised marginally upward over the past month. Also, the company’s earnings are anticipated to grow 15.6% and 13.2% in 2024 and 2025, respectively.
Northern Trust, based in Chicago, is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals.
Northern Trust’s revenues reflected a CAGR of 3.5% over the three years ended 2023, driven by higher non-interest income and NII. Further, its loans and lease balance saw a CAGR of 7.7% over the same time period. While loans declined during the first three quarters of 2024, revenues rose. Management considers this dip in loans a temporary fluctuation. Robust pipelines in the Asset Servicing segment and continued focus on the Wealth Management segment to acquire more clients will likely drive organic growth.
Additionally, NTRS has been consistently focusing on reinstating its operating leverage in the upcoming quarters. It has been focused on disciplined headcount management, vendor consolidation, rationalization of its real estate footprint and process automation. These efforts will likely improve productivity and boost the financial performance of the firm.
A solid liquidity position keeps capital distributions sustainable. The company has increased dividends once in the past five years. In October 2021, the company announced a 25-million share repurchase program with no expiration date. As of Sept. 30, 2024, roughly 13.3 million shares remained available under the authorization.
The Zacks Consensus Estimate for NTRS’ 2024 earnings has remained unchanged, while for 2025, it has been revised 1.2% upward over the past month. Also, the company’s earnings are anticipated to grow 19.8% and 5.6% in 2024 and 2025, respectively. The company has a market cap of $20.7 billion and currently sports a Zacks Rank of 1. The company’s shares have risen 24% year to date.
Stock Yards Bancorp, based in Louisville, KY, is a financial holding company that provides services in Louisville, central, eastern and northern Kentucky, as well as in Indianapolis, IN and Cincinnati, OH, metropolitan markets through 71 full-service banking center locations.
SYBT’s total revenues witnessed a 16.3% CAGR over the past five years ended 2023, driven by higher rates and efforts to boost non-interest income. The bank’s NII & non-interest income recorded a 16.7% and 15.3% CAGR, respectively, over the same time period. The uptrend continued for both NII and non-interest income during the first three quarters of 2024.
Further, the bank has been engaged in opportunistic expansionary initiatives. In 2022, Stock Yards Bancorp acquired Commonwealth Bank & Trust Company, expanding its presence in Louisville and extending its reach into attractive markets in Shelby County and Northern Kentucky. In 2021, it acquired Kentucky Bancshares, while it took over King Southern Bancorp in 2019. Such expansionary initiatives will continue to aid the company’s revenue streams.
Also, the company’s solid core deposit base and well-maintained capital position will likely aid its capital distributions. The company has been paying dividends regularly and has hiked its dividends four times in the past five years with a dividend payout ratio of 34%. Further, in May 2023, SYBT extended its share repurchase program, authorizing the repurchase of up to 1 million shares, which are set to expire in May 2025. As of Sept. 30, 2024, roughly 0.7 million shares remained available under the existing authorization.
SYBT, with a market cap of $2.2 billion, has risen 42% in the year-to-date period. The Zacks Consensus Estimate for its 2024 and 2025 earnings has remained unchanged over the past month. Further, the company’s earnings are expected to grow 3.8% and 5.7% in 2024 and 2025, respectively. SYBT carries a Zacks Rank of 2 at present.
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