Jacob Sonenshine

Bank stocks have enjoyed a solid start to the year, and they could gain more from here.

The SPDR S&P Regional Banking exchange-traded fund, home to lenders such as Citizens Financial Group, M&T Bank, and many others, is up 8% to just over $64 this year. After a brief decline in December and early January, buyers came in at around $58 to prop up the ETF. That's a price at which lenders just become too cheap to ignore, and the fact that it has rallied from there shows that investors and traders see plenty of reason for these companies' earnings to grow.

Some of the reason is related to the Federal Reserve. While the Fed didn't announce an interest-rate cut this week, the central bank also signaled it's certainly not about to go on another rate-hiking binge with inflation moving closer to the central bank's target. Should rates remain stable -- or even lower than last year -- through 2025, loan demand will remain fairly stable, supporting revenue for lenders. Since the Fed's Wednesday announcement to the end of trading Friday, the regional-bank ETF is up just over 1%, beating the S&P 500's 0.6% gain -- a signal that the interest-rate picture could still serve as a catalyst for more gains.

The other driver of the gains is President Donald Trump's agenda. He posted on Truth Social that the "Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses."

That's key because it reminds the market of what it had anticipated upon Trump's November victory, that the relaxed bank regulations would take the form of releasing more money to be lent within the banking system, another factor that would help lending revenue grow. Don't forget that the regional bank ETF rallied 15% to $68 from just before the election to late November.

It backed down from that level, partly because Trump's talk of tariffs, which restrict the flow of imports, raises prices and dents demand for goods and services such as loans, caused some selling across the stock market. But then buyers came in again because rhetoric around deregulation seems to have taken priority over tariffs, which economists and policy experts currently see as a mere negotiating tool with trading partners.

The result is that regional-bank stocks are showing the tendency to move higher, not lower. The sector has been on a larger uptrend since early 2023, and the ETF's shares are only a few dollars away from breaking above their 52-week high of $69. These are signs that buyers are ready, not hesitant, to bid these stocks higher.

That, combined with the policy-related tailwinds for the industry, is why Manish Kabra, head of U.S. equities strategy at Société Générale, recommends buying U.S. banks, specifically the regional-bank ETF.

The banks in the ETF could see improving fundamentals, especially in light of the policy changes. Aggregate revenue dropped last year, so with an easy comparison versus last year, and the fact that the U.S. economy is still growing, lending should tick up this year. Analysts who cover these banks are forecasting revenue growth, in aggregate, of 9% annually over the coming two years, according to FactSet. That doesn't even contemplate the positive consequences from the Trump administration's impending deregulation, which would make the growth look even better. This should be enough to spur healthy profit growth.

Look at Truist Financial, the result of the combined merger between BB&T and SunTrust, and our stock pick in late 2023. Analysts expect revenue to grow to $20.7 billion this year, and to grow another 5% to $21.75 billion next year, with growth across all of its businesses, including the still-small trust and asset-management business, which is still running at just under $2 billion annually.

Analysts expect stable loan growth, but a slight uptick in net interest margins, the percent of interest revenue the bank retains after its own interest expenses. That's certainly plausible, as banks' short-term funding costs are unlikely to rise, while they can charge higher rates on long-term loans.

The growth, combined with Truist's ongoing commitment to cost discipline, will drive the operating profit margin higher. Salaries, one of the company's major expenses, aren't expected to rise much faster than the low-single-digit-percentage growth of general wage inflation. Analysts expect earnings to rise in the mid-teens percentage annually over two coming two years, which seems more likely now than it did a couple of years ago; Truist, after having missed earnings estimates many times in the first few years as a combined entity, has now beaten expectations in seven of the past 10 quarters.

Continued execution -- and growth -- can bring the stock higher. It trades at just under 12 times expected earnings per share for the coming 12 months, about half of the S&P 500's 22 times, and similar to the bank ETFs multiple of about 16. As investors reassess bank stocks -- including Truist -- they will move higher. That should include Truist, which trades for just as cheaply as most regional banks, and has turned around its fortunes of late.

Sticking with smaller bank stocks could pay off.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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January 31, 2025 12:42 ET (17:42 GMT)

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