The U.S. economy got off to a good start in 2024, thanks to a robust labor market, increased consumer spending, technological advancements and optimism over potentially faster interest cuts by the Federal Reserve.

However, as inflation was high and did not decline as anticipated, the euphoria surrounding interest rate reduction progressively waned. 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. Despite this, the rate cut spree announced by the Fed has kept banking stocks in focus.

As we approach 2024 end, it is time to look back at how this year has fared for banking stocks. Major banks like Wells Fargo & Company WFC, Citigroup, Inc. C and Bank of America BAC rose more than 30% in 2024.

Price Performance

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Additionally, several banks have increased their capital distribution activities after the clearance of the 2024 stress test. Banks have also made efforts to diversify their revenue streams to reduce the dependency on spread income. Lately, several banks are acquiring or forming partnerships to strengthen non-interest income. Banks are venturing into the lucrative private credit business to capitalize on the growing demand for alternative financing options. These boosted investors’ sentiment, reinforcing confidence in the banking sector's stability.

As interest rates keep decreasing, it will lead funding/deposit costs to gradually stabilize and then decline. This will support expansions in 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.

Banks have been adopting digital technologies to enhance their client experience and online presence to capture a rising mobile banking population. 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.

Then again, banks’ weakness in asset quality is likely to persist in certain portfolios, especially in commercial real estate loans. Despite this, banks are having enough room to grow further.

3 Stocks in Focus, More Upside to Continue

We have listed below three banking stocks that have generated more than 30% return in 2024 and still have the potential to generate steady returns for investors banking on strong fundamentals and favorable macroeconomic factors.

Wells Fargo: The company is diverging revenue sources and reducing its reliance on NII. It has been methodically strengthening its corporate investment bank as it sees significant growth opportunities.

WFC significantly raised advisor retention in its wealth and investment management division, and emphasized serving its consumer banking clients and independent advisers, both of which should eventually spur development. The company's goals in the Commercial Bank division are to expand its treasury management business and provide clients with its investment banking and market capabilities.

At the Goldman Sachs 2024 U.S. Financial Services Conference held on Dec. 11, Wells Fargo’s CEO Charlie Scharf expressed confidence in the bank's progress to fix compliance problems following its years-long fake account scandal, detailing its efforts to implement risk controls. Last month, Reuters reported that WFC is in the final stages of meeting its regulatory requirements to remove the $1.95-trillion asset cap. This asset cap was imposed in 2018 following the revelation of its fake account scandal. Per the report, the asset cap could be removed in the first half of 2025, provided that the bank resolves its risk management and compliance issues. However, the decision to lift the restriction would require voting from the Federal Reserve's board of governors.

Given that loans are among a bank's largest assets, lifting the asset cap will mark a turning point for Wells Fargo. This will allow the bank to offer loans without restrictions, supporting its top-line expansion and long-term growth.

Wells Fargo's NII and NIM have been subdued by the increased funding costs as the high-interest rate environment weighed on it. Management expects 2024 NII to drop 9% from the year-ago period. However, with the central bank expected to keep lowering interest rates, it will support NIM expansion going forward.

The Zacks Consensus Estimate for WFC’s 2024 and 2025 earnings per share has been pegged at $5.28 and $5.49, implying a 2.8% year-over-year decline and 4% growth, respectively.

The Zacks Consensus Estimate for WFC’s 2024 and 2025 revenues has been pegged at $82.6 billion and $83.6 billion, suggesting a 0.02% year-over-year increase and 1.2% growth, respectively.

WFC currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Citigroup: This globally diversified financial services holding company’s CEO, Jane Fraser, is executing a sweeping overhaul of the bank to enhance its performance, reduce costs and simplify business operations.

The transformation process includes an organizational restructuring. In sync with this, in January 2024, C announced the plan to eliminate 20,000 jobs as part of its broad-scale restructuring effort over the next two years.

Citigroup continues to emphasize growth in core businesses through streamlining consumer banking operations globally. In sync with this, recently, the company completed the separation of its institutional banking business in Mexico from its consumer, small and middle-market businesses in December 2024. It also sold its China-based onshore consumer wealth portfolio to HSBC China in June 2024, winding down its U.K. retail banking business, and expanding personal banking and wealth management in the region.

With such optimization of management layers and reduction in functional roles, along with the bank’s consumer banking divesture efforts, the company projects revenues to see a compounded annual growth rate of 4-5% and annualized run rate savings of $2-$2.5 billion by 2026 end.

In the first nine months of 2024, NII declined 2% from the year-ago period. NIM declined to 2.33% in the third quarter of 2024 from 2.41% in the second quarter of 2024 and 2.42% in the first quarter of 2024. With a decline in interest rates, funding costs will stabilize and decline eventually. This will support Citigroup’s NII and NIM growth in the upcoming period.

The Zacks Consensus Estimate for C’s 2024 and 2025 earnings per share has been pegged at $5.88 and $7.21, indicating a 2.7% year-over-year decline and 22.6% growth, respectively.

The Zacks Consensus Estimate for C’s 2024 and 2025 revenues has been pegged at $81 billion and $83.3 billion, implying a 3.2% year-over-year increase and 2.8% growth, respectively.

Citigroup currently carries a Zacks Rank of 3 (Hold).

Bank of America: One of the largest financial holding companies in the United States, BAC is expected to benefit from the current high-rate regime and decent loan demand.

With the Federal Reserve cutting interest rates, Bank of America is expected to witness improvements in NII and net interest yield, going forward. At present, both are under pressure because of the drastic rise in funding costs due to four-decade-high interest rates. Management expects NII in the fourth quarter of 2024 to improve sequentially and expand further next year.

The bank embarked on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, it plans to expand its financial center network into nine new markets. The bank is committed to providing modern and state-of-the-art financial centers through ongoing renovation and modernization projects.

Bank of America is focused on acquiring the industry's best deposit franchise and strengthening the loan portfolio. Despite a challenging operating environment, deposits and loan balances have been solid in the past several years. As of Sept. 30, 2024, the company’s net loans and leases were $1.06 trillion, increasing modestly from the end of September 2023. While the tough macroeconomic scenario has been creating headwinds, the demand for loans is projected to be decent in the quarters ahead.

The Zacks Consensus Estimate for BAC’s 2024 and 2025 earnings per share has been pegged at $3.27 and $3.67, indicating a 4.4% year-over-year decline and 12.3% year-over-year growth, respectively.

The Zacks Consensus Estimate for BAC’s 2024 and 2025 revenues has been pegged at $101.8 billion and $106.5 billion, suggesting a 3.3% year-over-year increase and 4.6% year-over-year growth, respectively.

The company currently carries a Zacks Rank of 3.

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