3 Regional Bank Stock Picks From JPMorgan: Analyst 'Encouraged' After Solid Q3

The U.S. regional banking sector is showing resilience as several mid- and small-cap banks delivered stronger-than-expected third-quarter earnings, according to JPMorgan analyst Anthony Elian.

In a note on the sector's third-quarter earnings season, Elian highlighted widespread earnings beats and favorable outlooks, suggesting that regional bank stocks have room for further upside into 2025.

In addition to strong earnings reports, the Fed’s expected gradual rate cuts, the yield curve de-inverting, easing credit quality concerns, potential capital returns, and underweight positioning by investors all lead Elian to say he is “encouraged about the direction of regional banks.”

Earnings Beats Drive Outperformance

One week into the earnings season, seven regional banks in JPMorgan's coverage universe have reported results, with five of them beating core earnings-per-share (EPS) estimates. The primary driver behind these beats was stronger-than-expected net interest margins (NIM) and net interest income (NII).

As a result, regional bank stocks, represented by the SPDR Regional Banking ETF KRE, have outperformed the broader market, as gauged by the SPDR S&P 500 ETF Trust SPY, so far this month.

“With more beats than misses and 4Q24 outlooks generally trending better than prior consensus expectations, regional banks are outperforming through earnings season so far,” Elian noted.

Banking Sector’s Third-Quarter Trends

Several fundamental trends emerged for U.S. banks during the quarter.

Average deposits increased at a 7% annualized rate, while average loans grew by 2% annually. On a period-end basis, deposits rose at an even stronger 11% annualized pace, and loans increased by 3% annually. Importantly, NII expanded at a robust 12% annualized rate.

Despite some concerns over office loans, credit quality remained stable overall, though a few banks reported increases in non-performing assets (NPAs) related to office loans.

Bullish Outlook For Fourth Quarter And Beyond

Looking ahead, the outlook for the fourth quarter remains largely positive.

Many banks are guiding for modest growth across key metrics such as loan growth, NII, and fee income, while expense growth is expected to remain controlled.

Despite near-term headwinds, most banks in Elian's coverage universe expressed optimism about the NII trajectory into 2025, particularly as the Federal Reserve is expected to reduce interest rates further.

With “the Fed continuing to reduce the funds rate, this outlook should be further supported by an eventual rebound in commercial loan demand across the industry,” Elian said.

Regional Banks’ Valuation And Investment Outlook

Regional banks are still trading below historical valuations. JPMorgan’s coverage universe is currently priced at 1.3x 2025 estimated tangible book value (TBV), compared to the historical range of 1.8x to 2.0x.

This indicates substantial upside potential for a re-rating of the sector, particularly as investors remain underweight regional bank stocks. “Expect the sector to re-rate higher as investors recognize their improved financial health and earnings potential,” Elian noted.

Elian’s top picks for the sector include First Citizens BancShares Inc. FCNCA, Western Alliance Bancorp. WAL, and Pinnacle Financial Partners Inc. PNFP, all of which are well-positioned to capitalize on favorable market dynamics and potential earnings growth into 2025.

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