"This is Just the Beginning" for Bank Profit Growth: CFRA Analyst

The banking sector has been through a tumultuous period in recent years, with regional banks collapsing and interest rates fluctuating. However, according to CFRA Research, the worst may be behind us, and the future looks bright for bank profit growth. In a recent analysis, CFRA's Director of Equity Research and Diversified Bank Analyst, Ken Leon, and Regional Bank Equity Research Analyst, Alexander Yokum, discussed the factors driving bank profit growth and the outlook for the industry.

One of the key drivers of bank profit growth is net interest income (NII), which represents the difference between the interest banks earn on loans and the interest they pay on deposits. NII has remained resilient across all Big 4 UK banks in 2024, helped by fewer-than-expected central bank interest rate cuts and structural hedge income. This resilience has led to higher net profits for banks like Barclays and NatWest, while their larger peers are expected to book profit declines year over year. According to Visible Alpha, a part of S&P Global Market Intelligence, Barclays and NatWest are projected to achieve even higher net profits than in the bumper 2023, while HSBC and Lloyds Banking Group are forecast to book profit declines.

Another factor driving bank profit growth is interest rates. Rising interest rates can lead to increased NII, as banks can charge more for loans while paying less for deposits. However, this also increases the risk of defaults, which can negatively impact profitability. In the U.S., regional banks like PNC Financial Services Group Inc. (PNC) and Fifth Third Bancorp (FITB) are expected to benefit from higher interest rates, with implied upside of 30.9% and 11.7%, respectively, according to CFRA Research.



Bank size and diversification also play a crucial role in bank profit growth. Larger banks with diversified revenue streams tend to be more resilient during economic downturns. For instance, JPMorgan Chase & Co. (JPM), one of the largest global financial services companies, has an implied upside of 0.9% due to its diversified business model and strong capital position. Similarly, PNC Financial Services Group Inc. (PNC) has a valuable branch network and strong execution, making it an attractive option for investors.



Regulatory changes also play a significant role in shaping bank profit growth prospects. The U.S. regional banking crisis in early 2023 led to a sharp decline in long-term bond prices, resulting in massive losses for banks holding certain loans on their balance sheets. This event highlighted the importance of regulatory oversight and the need for banks to manage their loan portfolios more effectively. In response to these events, regulators may implement stricter capital requirements or limit banks' exposure to certain types of loans, which could impact banks' profit growth prospects.



In conclusion, the current banking environment supports profit growth for certain banks, while presenting challenges for others. Factors such as net interest income, interest rates, bank size, and regulatory changes all play a crucial role in shaping bank profit growth prospects. By understanding and addressing these factors, banks can improve their profitability and contribute to economic growth. As CFRA Research analyst Ken Leon stated, "This is just the beginning" for bank profit growth.