US banks outperformed the broad market significantly in January 2025, after a quite weak dynamic in December. So, it was the third time of outperformance over the last 4 months, but just the 11th time over the last 27 months. Moreover, the banks again ended the month in the green, for the 5th time over the last 7 months, or for the 10th time over the last 15 months.
EXECUTIVE SUMMARY
US banks outperformed the broad market significantly in January 2025, after a quite weak dynamic in December. So, it was the third time of outperformance over the last 4 months, but just the 11th time over the last 27 months. Moreover, the banks again ended the month in the green, for the 5th time over the last 7 months, or for the 10th time over the last 15 months. The BKX index soared by 8.7% MoM in January vs +2.7% MoM of the SPX index. The absolute January performance was +1.1 std from the mean monthly performance, and it was in the top 10% of absolute monthly performance in the index history. The relative January performance was +5.8% MoM. It was +1.2 std from the mean monthly performance, and it was in the top 9% of relative performance vs the SPX index since the inception of the BKX index. Despite to a decline in December, the BKX index outperformed the broad market significantly in 2024, adding +7.7% yoy or +0.7 std. But it was just the first year of outperformance over the last three. So, the start of 2025 was quite strong but growth of the BKX index was even stronger in January 2023, the year when the BKX index underperformed the broad market by 23%. In any case, all members of our sample except for USB, which recorded -0.1% MoM, ended the month in the green. FLG and C, the best performers of the month, skyrocketed by 26.8% MoM and 15.7% MoM, respectively, mainly driven by the 4Q24 earnings season. BOKF and STT, the second and the third worst performers, increased by 3.7%/3.5% MoM. The difference of monthly price changes between the best and the worst performers was just 26.9% in January 2025 vs 45.9% in January 2024. In turn, the correlation between price changes yoy and EPS FY25E changes yoy increased slightly MoM in January, still remaining quite high – at 84% as of the end of the month.
US banks continue trading with a significant discount to the broad market, but already at historical averages on an absolute basis. The discount to the SPX index was driven by quite weak performance of US banks on an absolute and relative bases in 2022-2023 years. However, it narrowed considerably in 2024. Thus, median P/E 25E of our group of banks increased from 11.3x (as of December 27, 2024) to 12.2x (as of January 31, 2025). Median P/E 26E went up from 10.2x to 10.7x over the same period of time. Hence, the banks are already trading at -0.2/0 std on P/E CY and at -0.5/-0.2 std on P/E NY (on the basis of samples from 2000 and 2010 years to the current moment) relative to their historical averages (as of January 31, 2025). As for valuations relative to the S&P 500 index, the banks are currently trading at -1.31 std and -1.33 std from the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. Median P/B of our group of banks was roughly flat in 2Q24, hovering around 1.17x. However, the ratio increased notably since then, climbing up from 1.17x (as of June 28, 2024) to 1.44x as of January 31, 2025 (but -0.04x since the end of November). So, on P/B, the banks are trading at +0.9 std from the sample mean (2010-current moment) vs +2.2 std for the PSX index, despite expected ROE premiums to historical averages are roughly the same for both BKX and SPX indexes. As for individual names, multipliers are still quite different. But the dispersion across banks decreased slightly during the last year (excl. FLG’s impact). Nonetheless, OZK’s P/E estimates for the nearest years are still around 8-9x while CFR’s ratios are 15-16x at the moment while OZK’s P/B is just 1.1x vs CFR’s P/B of 2.3x, despite roughly the same ROE estimates.
The US economy continued demonstrating strength, but uncertainty is still relatively high. Thus, 4Q24 US GDP increased by 2.3% qoq in 4Q24 vs the consensus of 2.6% qoq. The growth was driven by consumer spending but it wasn’t strong across the board. But estimates continue going up - it is expected that the US economy will increase by 2.2% yoy in 2025 and by 2.0% yoy in 2026. Also, labor market fears were almost wiped recently out due to quite strong hard data in 4Q24. Thus, headline payrolls beat expectations significantly in December, for the second consecutive time. It was added 256K new payrolls in December vs the consensus of 165K and the revised down November figure of +212K. Hence, average payrolls for 2024 year were at solid 185K, but it was much lower than the average for 2023 year of 251K. Moreover, total employment soared by 478K MoM in December vs -273K in November, the first growth over the last three months. Recent JOLTs also beat estimates while the unemployment rate decreased by 10 bps MoM to 4.1% in December vs the consensus of 4.2%, but still +40 bps yoy. On the other hand, higher economic growth as well as some deceleration of disinflation process mean the more hawkish Fed. The Fed continues to send signals for the second consecutive meeting that monetary policy easing has already paused for at least some time. So, interest rate expectations continue going up. Thus, it is expected less than 2 rate cuts in 2025 with the federal funds (FF) rate of 3.9% at the end of 2025 (3 months ago it was expected at 3.62%). Hence, higher for longer interest rates are again on the agenda with all the consequences that follow from this. Moreover, uncertainty of economic policy under Trump’s presidency still remains quite high, given his first decrees after taking the office.
The 4Q24 earnings season was much better than expected, driven by stronger NII due to higher NIM while loan growth still remains relatively bleak. Nonetheless, outlooks were more optimistic than feared, even despite return of higher for longer interest rates environment. Thus, 28 out of 30 banks from our sample reported better than expected EPS (vs 24 banks in 3Q24). The median surprise was +8.2% in 4Q24 vs +8.3% in 3Q24. Revenue of 23 out of 30 banks from our sample exceeded estimates in 4Q24 with the median surprise of +1.3% vs 23 banks and +1.1% in 3Q24. Median fee beat was 1.1% while NII exceeded estimates by 1.5%, primarily driven by higher NIM while loan growth was roughly in-line. Thus, 20 out of 28 banks from our sample for which estimates were available beat NIM estimates in 4Q24 with median beat of 3.3 bps (vs just 15 banks and beat of 1.0 bps in 3Q24). In turn, around 90% of the sample exceeded NII estimates. Given quite volatile interest rate expectations in 2H24 as well as lack of loan growth acceleration despite faster economic recovery, NII/NIM guidance held the limelight of the investors again. And NII outlooks were improved slightly, but the growth would remain weak in the nearest quarters as result of the more hawkish Fed. So, median NIM 25E of our sample of banks increased by 2.2 bps yoy, or +3.1 bps qtd, to 2.99% as of the end of January 2025, while NIM 26E went up by 0.8 bps ytd to 3.09%. In turn, loan growth still remains relatively weak even despite 100 bps decline of FF rate in 2024. According to the Fed H8 data, total loans increased by 2.9% yoy (as of January 15, 2025) vs +2.1% yoy a year ago. In turn, 16 out of 30 banks from our sample beat total loans estimates in 4Q24 (vs only 12 banks in 3Q24). Fees of 20 banks from our sample exceeded estimates in 4Q24, while OpEx still remained well controlled, albeit slightly higher than expected with the median surprise of +0.9%. So, operating leverage was positive again, for the second consecutive time. And we believe that it will remain positive in the nearest years, given gradual acceleration of NII growth. Due to still strong economic recovery, credit quality remained solid and significantly better than feared. Thus, just 10/12 banks from our sample missed NCO/NPLs projections (vs 8/13 in 3Q24).
Fundamentals of US banks continue improving while longer-term prospects have become brighter in recent months. So, FY EPS of US banks will return to growth in 2025 year after three consecutive years of negative dynamics. Nonetheless, we believe that relatively high volatility of both EPS/revenue estimates and quotes will persist in the near time. On the other hand, the baseline scenario of gradual positive EPS growth of US banks remains intact. In turn, the latter we still can't say so clearly about quotes of US banks after the rally in 4Q24. So, we remain neutral on the sector given still rich valuations.
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