Why Bank Stock ETFs Are Suddenly Outperforming

Exchange-traded funds for bank stocks have raced ahead, thanks to unexpectedly strong third-quarter earnings from the biggest banks in the United States.

Firms like JPMorgan Chase JPM, BNY Mellon BK, and Wells Fargo WFC have seen solid results despite concerns that falling interest rates would put downward pressure on their earnings from loans to consumers and businesses. This current spell of outperformance marks a change from most of 2024, during which time bank stocks have lagged the broader market.

After the close of trading on Thursday, Oct. 16—before big banks began reporting the next day—the $2 billion SPDR S&P Bank ETF KBE rose 4.9% through Tuesday’s close. The largest bank stock ETF, the $3.6 billion regional SPDR S&P Regional Banking ETF KRE, rose 5.4%. The Morningstar US Market Index rose just 0.8% from Friday morning through Tuesday’s close.

“Sentiment and commentary around banks is notably strong,” says Suryansh Sharma, equity analyst at Morningstar Research Services. “Except for net interest margin compression in some cases, everything looks reasonably decent for banks in the near term as the market is completely sold on the soft landing story,”

Bank stocks have slightly lagged the overall market in 2024, with the SPDR Bank ETF returning 22.2%, compared with 23.2% for the US Market Index. Regional banks trailed significantly more, only returning 15.4%. Bank stocks rose rapidly in July (around the time of second-quarter earnings) but fell in August, and the two ETFs have yet to match their summer highs.

A Broad-Based Rally

The biggest factor in the SPDR Bank ETF’s recent rise was Wells Fargo, which contributed 0.13 points of the ETF’s 6% rise over the previous five days. Even the top 10 biggest contributors manage to account for just 1.07 points, according to Morningstar Direct.

Gains were somewhat more concentrated in regional banks. First Horizon Corp FHN and Huntington Bancshares HBAN were tied for the largest contribution to the SPDR Regional Bank ETF’s 6.7% return over the last five days ending Tuesday. The top 10 contributors made up 2.3 percentage points of the ETF’s overall 6.7% return. This reflects the higher concentration of the regional bank ETF, which has 37% of its assets in its top 10 holdings, compared with just 13% for the overall bank ETF.

Are Bank Stocks Getting Ahead of Themselves?

Though bank stocks are up, investors may have gotten overly eager. “While a soft landing is increasingly the most likely scenario, we think alternative scenarios shouldn’t be completely discounted just yet,” says Sharma.

Out of the three big names that kicked off earnings last Friday (JPMorgan, Wells Fargo, and BNY Mellon), Morningstar analysts say BNY Mellon and JPMorgan are trading at a more than 20% premium to their fair value estimates, while PNC Financial Services Group PNC, Bank of America BAC, and Citigroup C are all at or close to their fair values.

Sharma says the bull case for these stocks sees loan growth (currently “tepid”) pick up, along with short-term rates stabilizing at just the right level to support the banks’ net interest margins. The bear case would come from “any macroeconomic pressure,” since current bank stock valuations have priced in a soft landing.

Here are some highlights from Morningstar’s takes on the earnings from the big banks.

Bank of America

• Analyst: Suryansh Sharma
• Fair Value Estimate: $39.50
• Morningstar Rating: 3 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

“Bank of America reported a solid set of numbers in the third quarter as investment banking continues to recover, asset valuations remain buoyant, trading revenue remains strong, and, most importantly, the macroeconomic consensus on a soft landing has strengthened the outlook for the next year ... We are maintaining our $39.50 per share fair value estimate as we fully incorporate the third-quarter results.”

BNY Mellon

• Analyst: Rajiv Bhatia
• Fair Value Estimate: $63.00
• Morningstar Rating: 2 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

“Bank of New York Mellon’s revenue was mostly steady in the third quarter...BNY’s stock has run up in recent months, and we believe the firm’s net interest income outlook may have been below buy-side expectations. Overall, we will maintain our wide moat rating and do not expect to materially alter our fair value estimate of $63 as we update our model.”

Wells Fargo

• Analyst: Suryansh Sharma
• Fair Value Estimate: $60.00
• Morningstar Rating: 3 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

“Wide-moat-rated Wells Fargo reported a good set of results, as fee income was strong and expenses were largely controlled. The shares were trading around 6% higher after the bank reported its results. The net interest income decline during the quarter was largely expected but the tepid performance of the bank in terms of loan growth was the only negative for us during the quarter...We are maintaining our $60 per share fair value estimate for Wells Fargo as we incorporate these third-quarter results. The shares of the bank are up by more than 50% in the past year, and we believe that the bank is fairly valued.”

Citigroup

• Analyst: Suryansh Sharma
• Fair Value Estimate: $70.00
• Morningstar Rating: 3 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: Medium

“Citigroup posted middling numbers in the third quarter, with a profit of $3.2 billion, or $1.51 per share, down 7% compared with $1.63 per share in the third quarter of the previous year ... The firm’s overall results are particularly lackluster, given various tailwinds like buoyant asset valuations, above-average trading revenue, and recovering investment banking fees. We are seeing some signs of progress on the expense front, but the progress is slow, and future execution remains highly uncertain, in our view. We are maintaining our $70 per share fair value estimate for the bank after incorporating third-quarter results.”

JP Morgan Chase

• Analyst: Suryansh Sharma
• Fair Value Estimate: $178.00
• Morningstar Rating: 2 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

“While JPMorgan is the strongest bank in our coverage in terms of competitive positioning and balance sheet strength, the current valuation remains demanding, and potential investors should wait for a better entry point in this high-quality name.”