In this piece, we will look at the ten best bank stocks to invest in for the long term.

Following the 2024 US presidential election, the banking industry has generated quite a lot of returns on the stock market. Bank stocks are dependent on interest rates, the lending environment, and the costs they incur. While higher rates mean that banks can increase their spread and boost interest earnings, if the rates remain high for too long, then the demand for capital dries up in the industry which affects the amount of money they can lend.

Additionally, higher rates also mean that for some banks, particularly those geared towards consumers, interest expenses also jump since they have to pay out hefty amounts to account holders. The high interest costs experienced by these banks don’t mean that those focused on investment banking are spared the ire of high rates. Investment banks suffer from reduced market activity during periods of high interest rates since most investors prefer the comfort of deposit accounts and other vehicles to enjoy risk-free interest income.

These principles have been evident on the balance sheets of some of the biggest banks in America during the Federal Reserve’s latest interest rate hiking cycle. As an example, consider the H1 2024 results of America’s second-largest bank by asset size. For the six months ending in June 2023, the bank earned $61 billion in interest income. This marked a strong 118% annual growth as the bank basked in the two-decade-high interest rate era in the United States. At the same time, however, the firm’s interest expenses sat at $32.4 billion to mark an even greater 731% annual jump. As a result, while pre-expense interest income grew by triple-digit percentages, after accounting for interest expense, the net interest income marked a 19% growth and was $28.6 billion.

Similarly, higher rates also mean that banks focused on investment markets end up struggling. This has been the case for America’s fifth-largest bank by asset size. While Wall Street in 2023 and 2024 has seen broader indexes driven by investors’ AI euphoria, in 2022, the markets faced one of their worst years in recent history. Back then, the Federal Reserve unleashed back-to-back 75 basis point interest rate hikes, and most stocks that were not geared to withstand the new economic conditions ushered by the high rates stumbled. From the start of 2022 to the market’s bottom in October, the flagship S&P index had lost 24.8% while the broader NASDAQ’s technology focus meant that it lost a heftier 34%.

Naturally, the fifth largest bank in America which derived 61% of its noninterest revenue from market-making and investment banking operations as of H1 2024 didn’t thrive in this environment. During H1 2022, its investment banking income dropped by 44% to $3.9 billion since it was accompanied by an even sharper drop of 49% for the second quarter. For the full year, the bank recorded a 95% drop in its 2021 ‘Other principal transaction’ revenue of $11.6 billion. This line item included revenue from its “equity investing activities, including revenues related to our consolidated investments (included in Asset & Wealth Management), and debt investing and lending activities (included across our three segments).”

During the Q4 2022 earnings call, management commented on the tough year. CEO David Solomon shared how while his firm was eager to cut costs, it had to ensure that it kept up with competitors in retaining talent. The bank’s stock fell by 6% in early trading following the earnings as investors were spooked by the fact that operating expenses jumped by 11% at a time when revenue fell by 16% and profit dropped by a painful 66%.

Back then, Solomon also shared how high rates and a tight economy had made things difficult for his firm:

“Simply said, our quarter was disappointing and our business mix proved particularly challenging. These results are not what we aspire to deliver to shareholders. We generated revenues of $10.6 billion and net earnings of $1.3 billion and earnings per share of $3.32. After nine straight quarters of double-digit returns, fourth quarter performance was certainly an outlier. Results were impacted by several near-term challenges given the difficult operating environment. On the revenue front, underwriting volumes remained extremely muted despite green shoots that appeared at the end of the third quarter.

Thicken equity activities, activity levels dropped after a busy and volatile year for many of our clients and our equity investment portfolio saw continued headwinds. We also saw higher loan loss provision and expenses. While compensation expenses were down 15% for the year, quarterly expenses rose modestly versus the third quarter. We always strive to maintain a pay-for-performance culture. With revenues down, compensation was lower. That said we also recognize that we operate in a talent-driven business and we must continue to invest in our people whose dedication is critical to our world class franchise. On our earnings call last July, we first spoke about the challenging operating environment and the proactive measures we were taking on expenses, including slowing hiring velocity and reducing certain components of our non-compensation costs.”

While the incoming Trump administration’s perceived business friendliness and its effects on the economy are one reason the S&P’s bank stock index jumped by 12% after the elections, another reason is regulations. Investors believe that the incoming administration will not be as strict with the big banks. Heading into the elections, regulations were at the forefront of the industry’s concerns as we discussed in our coverage of 10 Best Diversified Bank Stocks to Buy Now. Now, banks are hoping that Basel III Endgame, fair lending rules, heads of regulatory bodies, and private lending are some areas that the new administration might provide them some relief with.

Our Methodology

To make our list of the best bank stocks to buy for the long term, we first ranked all US-traded bank stocks by their market capitalization. Out of these, the 40 most valuable stocks in terms of market capitalization were re-ranked by the number of hedge funds that had bought the shares in Q3 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10. The Bank of New York Mellon Corporation (NYSE:BK)

Number of Hedge Fund Investors In Q3 2024: 45

The Bank of New York Mellon Corporation (NYSE:BK) is one of the biggest banks in America. It is a Global Systematically Important Bank (GSIB) as dubbed by the US government. This designation means that the bank is somewhat buffered against disruptive events. The Bank of New York Mellon Corporation (NYSE:BK) is a diversified bank, and it earns revenue through interest and other services. The diversification allows it to benefit from different kinds of economic environments. For instance, during H1 2024, 67% of The Bank of New York Mellon Corporation (NYSE:BK)’s revenue came through investment services, performance, and management fees. These sectors typically benefit when interest rates are dropping, indicating that perhaps the reason behind The Bank of New York Mellon Corporation (NYSE:BK)’s 53.7% year-to-date share price gain. On a micro level, the bank’s One BNY strategy through which it aims to consolidate different business functions such as investment management and accounts should drive the hypothesis.

The Bank of New York Mellon Corporation (NYSE:BK)’s management commented on the One BNY initiative during the Q3 2024 earnings call. Here is what they said:

“This program enabled our top client coverage people and their business partners to take a One BNY view to account planning, creating a shared vision for serving each of our clients holistically across the entire relationship, generating new ideas to meet the clients’ objectives and developing action-oriented plans to deliver on those goals. During the quarter, we also made progress toward running our company better, including the ongoing transition to a platform’s operating model, enhancing the connectivity across our teams and empowering our people to drive change across the company. In September, we went live with the next step on our multiyear plan to unite related capabilities around BNY and elevate our execution by doing things in one place and doing them well.

We now have about 13,000 or about one-quarter of our people working in our new operating model. As we’ve said before, powering our One BNY culture in order to be more for our clients and run our company better requires not just words, but action.”

9. Citizens Financial Group, Inc. (NYSE:CFG)

Number of Hedge Fund Investors In Q3 2024: 46

Citizens Financial Group, Inc. (NYSE:CFG) is a Rhode Island-based regional bank. The firm operates in the consumer, commercial, and private banking markets. The diversification allows exposes it to different markets, which insulates it against a downturn in any one. In particular, Citizens Financial Group, Inc. (NYSE:CFG) benefits from the private banking market which is somewhat insulated against economic weakness as it typically targets high-net-worth individuals. The bank has been making major moves over the past couple of years through acquisitions. It has acquired HSBC’s US retail operations and ICBC to expand its presence in regions such as NYC and Philadelphia. These deals can add to the firm’s profitability, and Citizens Financial Group, Inc. (NYSE:CFG) also benefits from 21% of its total deposits being noninterest paying deposits that provide it with cheap capital to earn money on.

Citizens Financial Group, Inc. (NYSE:CFG)’s management commented on its private banking performance and interest income expectations for the current quarter during the Q3 2024 earnings call:

“Notably, our private bank revenue rose 64% to $49.7 million in the third quarter breaking even by mid-quarter. We are on track for the private bank to start contributing to earnings in the fourth quarter and add meaningfully to EPS next year. Moving to Slide 18. We provide a guide for the fourth quarter. This outlook contemplates a 25 basis point rate cut in each of November and December. We expect NII to be up about 1.5% to 2.5%, driven primarily by a 5 basis point improvement in net interest margin, reflecting the benefit of swaps given lower rates, deposit repricing, non-core runoff and favorable front book back book dynamics, partially offset by lower asset yields.

Spot loans should be up slightly paced by private bank and commercial sponsor activity. Non-interest income should be up mid- to high-single-digits reflecting expected seasonal strength in capital markets. Our deal pipelines are robust and we expect to see a strong finish to the year. We also expect modest improvements across other key categories. Non-interest expense is projected to be up about 2%, and we expect to achieve positive operating leverage.”