The first half of 2024 was the banner one for the S&P 500 Index. It rallied 14.5% during the period, touching all-time highs several times.

This also showed that the momentum that started in November 2023 has continued this year. The primary drivers for the steady uptrend in the index are the clarity on the path of interest rates and robust economic growth, along with persistently cooling inflation numbers. Thus, almost all the sectors within the S&P 500 Index rallied during the first half. Among the top three was the Financial Services, which gained nearly 9% during the period.

One of the largest constituents of the sector – banks – were in the spotlight as the Federal Reserve continued to signal a rate cut later this year. Hence, the S&P 500 Banks Industry Group Index was up roughly 15%. Of the banks that are part of the S&P 500 Index, only Citigroup (C Quick QuoteC - Free Report) , Wells Fargo (WFC Quick QuoteWFC - Free Report) , JPMorgan (JPM Quick QuoteJPM - Free Report) , Bank of America (BAC Quick QuoteBAC - Free Report) and BNY Mellon (BK Quick QuoteBK - Free Report) outperformed the index. All these banks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Here’s how these five banks performed in the first six months of 2024:

Price Performance in First-Half 2024
 

Image Source: Zacks Investment Research

Before discussing the above-mentioned five banks, let’s check out the reasons that drove investor confidence in bank stocks.

One of the key reasons for the bullish investor sentiments was the Fed’s signal of interest rate cuts later in 2024. Though, initially, the market participants projected the first cut in rates occurring as early as March, incoming economic data showed that the central bank would wait for further confirmation on inflation cooling down before doing so. The Fed now is likely to cut rates for the first time in September.

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. Nonetheless, the economic growth is now slowing down. The real GDP for the first quarter of 2024 declined to 1.4% from 3.4% recorded in the fourth quarter of 2023.

Additionally, per the Fed’s latest Summary of Economic Projections, the real GDP is expected to grow at the rate of 2.1% this year. With the anticipation that inflation will continue to come closer to the Fed’s 2% goal, the chances of the U.S. economy’s soft landing are high.

Hence, driven by these developments, investors continue to be bullish on bank stocks. With the central bank keeping the rates stable at 5.25-5.5%, deposit costs are stabilizing and even coming down. Thus, pressure on the net interest margin is likely to decline eventually.  As the economy remains strong, the lending scenario will likely improve modestly. So, the banks’ net interest income (NII) is expected to be stable.

However, banks are not fully out of the woods. The major concern is the exposure to commercial real estate (CRE) loans. This is turning out to be a stress on the banks’ 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 the regional banks to some extent.

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

Banks Perform Impressively on Robust Fundamentals

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 has announced the completion of major actions to simplify its operating structure and improve performance that were announced in September 2023.

As a part of this initiative, C has 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 and Indonesia.

It has substantially wound down consumer banking businesses in South Korea, Russia and China. Also, the company has restarted its sale procedure in Poland and remains on track to separate its Mexico business through an IPO in 2025. 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.

Also, following the clearance of the 2024 stress test, C plans to raise its quarterly dividend by 6% to 56 cents per share. On the other hand, given the current challenging operating backdrop, the company “will continue to assess share repurchases on a quarter-to-quarter basis.”

Wells Fargo: One of the largest banks in the country, Wells Fargo, is gradually resolving regulatory issues that have been plaguing it since the sales scandal in 2016. Though it remains under close supervision of the regulatory authorities and has an asset cap in place, the recent developments show the lender is on the right path.

Since third-quarter 2020, WFC has been actively engaging in cost-cutting measures, including the streamlining of its organizational structure, closure of branches and reduction in headcount. The bank delivered gross expense savings aggregating $10 billion in 2021-2023. It expects to continue with these efficiency initiatives in 2024. Management projects non-interest expenses to be $52.6 billion this year, indicating a decline from the $55.6 billion in 2023.

Wells Fargo is revamping its home lending operation by reducing its mortgage servicing portfolio and exiting the correspondent lending business. As the demand for mortgages and refinancing activities continue to be low due to higher rates, the company is executing this plan to “continue to reduce risk in the mortgage business.”

WFC continues to build on its deposit base, which witnessed a three-year (ended 2023) CAGR of 1.1%. A large base of retail clients, as well as considerable strength in the consumer business and commercial banking segments, will likely aid the deposit balance in the upcoming period.

After the clearance of this year’s stress test, WFC announced its intention to hike the quarterly dividend by 14% to 40 cents per share. Further, the company noted that it has the capacity to repurchase shares over the four quarters beginning the third quarter of 2024.

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 immensely support the company’s financials.

JPMorgan keeps expanding its footprint in new regions despite the proliferation of mobile and online banking options. In February, the bank 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 48 states in the United States. Earlier in 2018, the bank announced plans to enter 25 new markets by opening new branches.

By expanding its footprint in newer markets, JPMorgan will be able to improve cross-selling opportunities by increasing its presence in the card and auto loan sectors. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to further expand the reach of its digital bank across the European Union countries. JPMorgan is also focused on expanding the CIB and AWM businesses in China.

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 over the past several years. As of Mar 31, 2024, the loans-to-deposit ratio was 54%. 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 in the near term.

JPM intends to increase its quarterly dividend second time this year as it cleared the 2024 stress test. The company, now, intends to hike the dividend by 9% to $1.25 per share after announcing a 10% rise in March. JPM also authorized a new $30 billion share repurchase program, effective Jul 1, 2024.

Bank of America: One of the largest banks in the country, Bank of America continues to face adverse impacts from prolonged higher rates. Nonetheless, the company gets support from improvements in the capital markets business and initiatives to digitize banking operations. These efforts are likely to support its fee income growth.

BAC continues to align its banking center network according to customer needs. The bank is set to embark on an ambitious expansion plan to open financial centers in new and existing markets. In the last couple of years, it entered eight new markets and now plans to expand its financial center network into nine new markets by 2026. These initiatives, along with the success of Zelle and Erica, will enable the company to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards.

Additionally, Bank of America remains focused on acquiring the industry's best deposit franchise and strengthening the loan portfolio. Despite a challenging operating environment, deposit balances and loans have remained solid over the past several years. As of Mar 31, 2023, the company’s net loans and leases grew marginally year over year to $1.04 trillion. While the tough macroeconomic scenario remains a headwind, the demand for loans is projected to be decent in the quarters ahead.

After it cleared the 2024 stress test, BAC announced plans to increase its quarterly dividend by 8% to 26 cents, beginning in the third quarter of 2024.

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 thereafter. NIR recorded a five-year (ended 2023) CAGR of 3.8%. Though a rise in funding costs will likely weigh on NIR, the metric is anticipated to keep improving in the quarters ahead, driven by the high interest rate regime.

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 2023, non-U.S. revenues constituted 36% of total revenues. BK’s international revenues are expected to continue improving as the demand for personalized services rises globally.

Following the declaration of 2024 stress test results, BK announced its plans to increase the quarterly cash dividend by 12% to 47 cents per share, beginning as early as the third quarter of 2024. Further, the company’s existing share repurchase program, which has authorization of approximately $7.4 billion, will continue.