"The arrival of Trump 2.0" Wall Street sings bullishly for U.S. regional bank stocks

According to the Zhitong Finance APP, Wall Street is optimistic about the performance of regional bank stocks in 2025, as U.S. President Donald Trump has promised to create a more friendly regulatory environment.

Although regional bank stocks are expected to benefit from "Trump 2.0," the SPDR S&P Regional Banking ETF (KRE), which tracks the performance of regional banks, has underperformed the S&P 500 index by about 7% this year.

Nathan Race, an analyst at Piper Sandler, stated, "Given the potential for revenue growth and positive revisions to earnings per share expectations, we believe the focus will be on guidance for 2025."

Recently, the U.S. Treasury yield curve has returned to normal, with long-term rates exceeding short-term rates, which makes Race more optimistic. Banks typically borrow at short-term rates and lend at long-term rates. Generally, when the yield curve is upward sloping, the spread between borrowing and lending rates for banks widens, allowing them to charge higher rates on loans while paying lower rates on deposits or short-term borrowings.

"With regulatory easing driven by the elections likely on the horizon, and recent increases in valuations/rates, we also expect M&A prospects to become a focal point of discussions during the fourth-quarter earnings season," the analyst added.

Anthony Elian of JP Morgan also expressed encouragement in his report regarding the outlook for regional banks in 2025.

Elian believes that the fundamentals for loan and deposit growth, as well as the expansion of net interest margins, have improved. Another reason for his optimism is that since the U.S. elections, "investors have shown increasing interest in the sector but have not yet collectively bought in."

Elian pointed out that despite the optimistic outlook, the bank stocks he tracks are still trading at relatively low prices.

He stated that the next wave of gains for bank stocks could be driven by Trump’s policies, industry loan growth, regulatory easing, and a return of M&A activity.

Elian's preferred stocks in the regional banking sector for 2025 include: Alliance West Bank (WAL.US), First Citizens Bancshares (FCNCA.US), and Pinnacle Financial Partners (PNFP.US).

Notably, hedge fund mogul Stanley Druckenmiller's Duquesne Family Office increased its holdings in regional bank stocks in the third quarter ending September 30, 2024.

As the New Year approaches, Raymond James analyst Michael Rose expressed optimism for banks that are likely to benefit the most from a relaxed regulatory environment, positive operating leverage, and a steepening yield curve.

Barclays analyst Jared Shaw's forecast for the banking sector in 2025 aligns broadly with his sell-side peers: a macroeconomic environment favorable for growth and M&A, along with an optimistic outlook for net interest margins.

Shaw stated, "We believe that as several quarters of performance reflect the improving macro backdrop, investors will continue to enter this space." He added that regional banks' capital exposure in the battered commercial real estate market is a disadvantage that will ease next year