Yield Curve Normalization, Cheap Valuation, EPS Growth To Boost Banks In 2025: Truist Initiates Coverage On These 14 Regional Names

As the Federal Reserve's aggressive interest rate hikes in 2022 led to an inverted yield curve, investors are now anticipating a normalization of the yield curve in 2025. This normalization, coupled with cheap valuations and expected earnings per share (EPS) growth, is poised to boost banks in the coming years. Truist, a leading financial services firm, has recently initiated coverage on 14 regional names, further enhancing their investment potential.



Yield Curve Normalization and Banks' Net Interest Margins
The normalization of the yield curve is expected to have a significant impact on banks' net interest margins (NIM) in 2025. As long-term interest rates rise, the cost of funding for banks will increase, compressing their net interest margins. This compression is due to the narrowing spread between short-term and long-term interest rates. For instance, in the most recent episode of yield-curve flattening, from December 2015 to September 2018, a cumulative increase in the federal funds rate of 200 basis points was accompanied by a compression of 125 basis points in the difference between the yields on three-month and ten-year U.S. Treasury securities. This flattening of the yield curve led to a decrease in banks' net interest margins.

Regional Banks Expected to Benefit from Cheap Valuations and EPS Growth
Several regional banks are expected to benefit from cheap valuations and EPS growth in the coming years. Truist's initiation of coverage on these 14 regional names further supports their investment potential. Some of the regional banks expected to benefit from these factors include:

1. Zions Bancorp (ZION): Zions Bancorp is expected to report double-digit growth in quarterly profits, with net interest income gains of 24.1%. This is driven by the Federal Reserve's interest rate hikes. Additionally, Zions' focus on community banking and small to medium-sized business lending has resulted in robust loan growth and improved asset quality.
2. East West Bancorp (EWBC): East West Bancorp is projected to have the highest earnings growth among the regional banks, with a 32.9% increase in adjusted EPS. This is accompanied by significant net interest income growth of 44.8%. The bank's strong performance is attributed to its strategic expansion and cost management initiatives.
3. Comerica, Inc. (CMA): Comerica is expected to report a 65.2% increase in adjusted EPS, with net interest income growth of 53.5%. The bank's strong performance is driven by its effective management of expenses and a focus on growing its loan portfolio.
4. Fifth Third Bancorp (FITB): Fifth Third Bancorp is projected to have a 14.6% increase in earnings, with net interest income growth of 28.8%. The bank's diversified business model and strong consumer and commercial lending activities have contributed to its solid performance.



Truist's Initiation of Coverage Enhances Investment Potential
Truist's initiation of coverage on these 14 regional names influences their investment potential in several ways. First, it increases the visibility and exposure of these regional banks, potentially attracting more investors and analysts to analyze and invest in these companies. This increased exposure can lead to higher trading volumes and liquidity, making it easier for investors to buy and sell shares. Additionally, with increased visibility and exposure, these regional banks may have better access to capital markets, allowing them to raise funds more easily for expansion, acquisitions, or other strategic initiatives. Truist's initiation of coverage may also encourage other analysts and firms to follow suit, leading to more comprehensive and diverse analyst coverage. This can help investors make more informed decisions and provide a broader perspective on the investment potential of these regional banks. Furthermore, with increased analyst coverage and exposure, these regional banks may receive more accurate and up-to-date valuations, helping investors identify undervalued or overvalued stocks. Lastly, the increased exposure and analyst coverage may attract more institutional investors, such as pension funds, hedge funds, and mutual funds, leading to increased investment in these companies and enhancing their investment potential.

In conclusion, the normalization of the yield curve in 2025 is expected to have a significant impact on banks' net interest margins. However, regional banks with cheap valuations and expected EPS growth are poised to benefit from this normalization. Truist's initiation of coverage on these 14 regional names further enhances their investment potential by increasing visibility, exposure, and access to capital, as well as potentially improving analyst coverage, valuation, and institutional investment. Investors should closely monitor these regional banks as they navigate the changing interest rate environment and capitalize on the opportunities presented by the normalization of the yield curve.