Bank Stocks Hit Inflection Point After Fed's 50 Basis Point Cut, Analyst Reveals Top Picks

The Federal Reserve's decision to reduce interest rates by 50 basis points on Wednesday has set the stage for a notable shift, particularly in the banking sector among mid- and small-cap banks.

With rates expected to drop further over the next two years, JPMorgan analyst Steven Alexopoulos believes this marks a crucial inflection point. This and further cuts should help boost banks' net interest margins (NIMs) while reigniting commercial loan demand. The steepening yield curve and easing credit concerns will help banks recalibrate deposit costs, improving performance across various segments.

Let's break down the investment opportunities among large-cap, mid-cap, and small-cap banks, as outlined by Alexopoulos.

Large-Cap Banks: Poised For Growth

First Citizens BancShares FCNCA

First Citizens stands out with its SVB segment likely to benefit from the Fed's cuts. With lower rates, the company expects a resurgence in venture capital (VC) investment and IPO activity. This should bolster its sizable SVB loans and deposits. Trading at a discount to peers, this stock offers a compelling value. Alexopoulos also sees potential for significant multiple expansion as the market re-rates it.

Huntington Bancshares HBAN

Huntington positions itself to take advantage of improving commercial and industrial (C&I) loan demand by aggressively hiring bankers in growth markets like the Carolinas and Texas. As the Fed eases, the bank anticipates accelerated earnings, strong loan growth, and a solidified position in the sector.

M&T Bank MTB

As the Fed eases, M&T's criticized loans should see an improvement in credit quality, particularly in the commercial real estate (CRE) sector. This will likely reduce the bank's need for high reserve levels and allow for increased buybacks. The analyst says that trading below its historical valuation, M&T offers an opportunity for re-rating as the economic outlook brightens.

Don't miss out on this unparalleled opportunity:

• Register now to secure your spot at Benzinga's Largest SmallCap Conference ever in Chicago!

Mid-Cap Banks: Reaping The Benefits Of Lower Rates

Western Alliance WAL

Western Alliance will benefit from the lower rate environment, seizing opportunities to reduce deposit costs and ease credit concerns. According to Alexopoulos, its exposure to the startup economy and capital call lending positions it well to take advantage of a potential resurgence in venture capital and IPO markets, making it a standout mid-cap pick.

Pinnacle Financial Partners PNFP

Pinnacle plans to lower its high deposit rates, boosting net interest income (NII). The analyst says Pinnacle operates in high-growth markets in the Southeast and sports above-peer loan growth. This, combined with easing concerns around credit quality, makes it an attractive investment as the Fed continues its rate cuts.

Cullen/Frost Bankers CFR

Despite its asset-sensitive balance sheet, Cullen/Frost will benefit from the Fed's cuts by focusing on organic expansion in Texas's fastest-growing cities. The potential for improved loan demand, especially in commercial real estate, should drive outsized growth. Alexopoulos sees this as presenting a revaluation opportunity for the stock.

Small-Cap Banks: Ready For Resurgence

Live Oak Bank LOB

Live Oak, with most of its deposits in market-rate accounts, expects a significant reset in funding costs as rates decline. This niche growth bank plans to lead loan growth by capitalizing on improved borrower demand as borrowing cost uncertainty diminishes.

Metropolitan Bank MCB

Metropolitan stands to benefit from easing concerns around its CRE loans, with the Fed's cuts reducing fears about credit quality. The bank's unique focus on niche sectors and proactive credit management positions it well for an economic rebound.

Amalgamated Bank AMAL

Amalgamated, a smaller player exposed to high credit risk profiles, will improve as rates decline. The bank's focus on social impact banking combined with a favorable rate environment should alleviate concerns around credit stress. Alexopoulos sees this as providing room for upside in its share price.

As the Fed signals further easing, banks across segments will capitalize on improving economic conditions, rising loan demand, and a recalibration of deposit costs. With the runway for a soft landing widened, now is a compelling time to consider these names for your portfolio.

Read Next:

• Small-Cap Sectors Brace For Fed Rate Cut: Financials, Real Estate ETFs Offer Compelling Plays For Investors

Don't miss the opportunity to dominate in a volatile market at the Benzinga SmallCAP Conference on Oct. 9-10, 2024, at the Chicago Marriott Downtown Magnificent Mile.

Get exclusive access to CEO presentations, 1:1 meetings with investors, and valuable insights from top financial experts. Whether you're a trader, entrepreneur, or investor, this event offers unparalleled opportunities to grow your portfolio and network with industry leaders.

Secure your spot and get your tickets today!

Image created using artificial intelligence via Midjourney.