The Best Bank Stocks to Buy (2024)

After enduring a bumpy 2023, the financial services sector has followed a smoother path this year. So far in 2024, the Morningstar US Financial Services Index is outperforming the Morningstar US Market Index, up 19.11% compared with 18.18% for the benchmark.

The financial services sector looks 4.2% overvalued as of Aug. 26, 2024.

Is Banking a Good Industry to Invest in Today?

Suryansh Sharma, Morningstar’s equity analyst covering bank stocks, says that because the large money center banks look fairly valued or slightly overvalued, he currently sees more opportunity in regional banks. “Expense growth for the US banking sector has been higher than the long-term historical average in the past two to three years. We think US banks are much more focused on controlling their expenses, and expense growth should normalize in the upcoming years. This will also assist profitability.”

On the news of expected interest-rate cuts, Sharma anticipates growth in several areas. “Lower rates should help investment banking revenue recover and boost mortgage originations. The overall macroeconomic outlook should also be supported by lower rates, and they should support lower unemployment rates and GDP growth in the near term.”

Our entries for the best bank stocks to buy are all from firms that earn Morningstar Economic Moat Ratings of wide or narrow and are trading below our fair value estimates as of Aug. 26, 2024.

The 5 Best Bank Stocks to Buy Now

1. Banco Santander SAN
2. Lloyds Banking Group LYG
3. ING Groep ING
4. US Bancorp USB
5. Banco Bilbao Vizcaya Argentaria BBVA

Here’s a little more about each of the best bank stocks to buy, including commentary from the Morningstar analysts who cover each stock. All data is as of Aug. 26, 2024.

Banco Santander

• Morningstar Price/Fair Value: 0.77
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.23%

Banco Santander is the cheapest bank on our list of best bank stocks to buy now. The bank enjoys an attractive funding structure and funds itself primarily via customer deposits with a limited need for institutional funding. Its cost/income ratio is one of the lowest in Europe. Shares of Banco Santander are trading at a 23% discount to our fair value estimate of $6.30.

Santander generates around 45% of its earnings from its highly profitable Latin American operations. The subscale returns Santander has historically recorded in Europe and the US have obscured the high-double-digit/early-20s returns on equity Santander generates from its Latin American operations. Santander is confident that it can significantly improve the profitability of its European and US businesses, supported by higher interest rates. We wonder if Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio, so that it operates only in areas where it has a clear competitive advantage.

Santander is one of the market leaders in Brazil, Mexico, and Chile. Santander’s strong competitive position in these consolidated, oligopolistic markets protects its high profitability. Its profitability has suffered from low interest rates, especially in its European operations. The return to a more normalized monetary policy environment has supported a profitability improvement in Santander’s European and US operations.

We believe investors have typically discounted too much risk in their valuation of Santander. We agree that Santander’s emerging-markets exposure comes with greater risk. However, Santander’s earnings have been remarkably stable compared with most of its European peers. While diversification plays a role, its low exposure to investment banking and relatively low exposure to home loans also contributed. Investment banking earnings tend to be volatile, while the long duration and inferior margins of home-loan books tend to lead to significant write-downs relative to earnings during downturns in the credit cycle.

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Santander is looking to its investment banking, wealth management, vehicle finance, and payment businesses to drive growth ahead of its peers. These areas could present low-hanging fruit where Santander operates below its natural market share. Santander’s intention to grow its investment banking business does puzzle us somewhat; many of its European peers have struggled to generate adequate profitability in the highly capital-intensive and volatile investment banking segment.

Read more about Banco Santander here.

Lloyds Banking Group

• Morningstar Price/Fair Value: 0.80
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.73%

Lloyds Banking Group looks 20% undervalued compared with our $3.90 fair value estimate. This top bank stock earns a narrow moat rating thanks to cost advantages and switching costs stemming from its strong position in the UK, which makes up about 95% of its assets. It benefits from a sizable deposit base establishing a low-cost and sticky funding source, as well as low operating costs.

Lloyds is a pure UK banking play, with 95% of its assets based domestically. Since its massive restructuring, which started in 2011, the bank has emerged as a low-risk domestic retail and commercial bank. It has shed about GBP 190 billion in runoff assets and GBP 200 billion in risk-weighted assets and has significantly reduced its dependence on wholesale funding. Today, Lloyds operates one of the strongest retail franchises in the United Kingdom.

Mortgage pricing is under pressure in the UK as challenger banks look to gain scale and ring-fencing regulations increase liquidity in the market. Although mortgages constitute the lion’s share of loans to customers (66%), Lloyds has delivered robust net interest margins, speaking to its large deposit funding base and policy to prioritize margins over volume. Additionally, as competitive pressure in this market segment has risen, Lloyds has shifted its focus to building out its financial planning offerings, beefed up its credit card loan book, and targeted loan growth in small and medium-size enterprises.

Read more about Lloyds Banking Group here.

ING Groep

• Morningstar Price/Fair Value: 0.83
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 6.73%

ING Groep features a material funding advantage that comes primarily from its strong competitive position in Dutch retail banking. Shares of this affordable bank stock are trading at a 17% discount to our $3.90 fair value estimate.

We believe ING’s strong deposit franchises in its core markets are its greatest competitive advantage. Ultralow interest rates over much of the preceding decade completely obscured the benefits that come with having a constant source of cheap funding.

Our perspective is that the highly concentrated Dutch banking system presents one of the most appealing banking jurisdictions in Europe. The top three Dutch banks collectively hold over 90% of current accounts, a stark contrast to the fragmented banking systems prevalent in much of the eurozone. ING, as the market leader in Dutch personal current accounts with a 40% market share, has translated this dominance into consistently robust returns on equity, north of 20% for its Dutch banking operations.

ING DiBa, ING’s digital German bank, is highly profitable in what we view as the eurozone’s least attractive banking market. While this is truly impressive, we are unsure how maintainable it is as the competition is increasing in German digital banking, which could drive ING’s profitability down to the low-single-digit norm in German banking.

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ING corporate banking and Belgian retail banking operations have consistently dragged down overall profitability. In Belgium, ING is not one of the market leaders, and its corporate business needs to increase its transactional and deposit-taking franchise.

Read more about ING Groep here.

US Bancorp

• Morningstar Price/Fair Value: 0.86
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 4.32%

US Bancorp, next on our list of the best bank stocks, has been one of the most profitable regional banks we cover. Each of US Bancorp’s business units is a strong performer. The core retail and wholesale banking segments by themselves would be some of the strongest core banking operations under our coverage. Shares of US Bancorp are trading at a 14% discount to our fair value estimate of $53.00.

US Bancorp is the largest non-GSIB in the US and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns, while some peers seem to be gradually “catching up” over time.

The bank has national scale and a unique mix of fee-generating businesses, including payments, corporate trust, wealth management, and mortgage banking, all while avoiding investment banking. The payments business consists of merchant acquiring, corporate payments, and the more typical retail credit cards and debit cards. The trust businesses involves being an admin and custodian for different investment vehicles. Most regional peers don’t have these in their business mix. While these units have generated attractive returns, their heavy fixed-cost nature and scalability have led to consolidation in both industries and therefore heavy competition, with US Bancorp now being a relatively small player compared with the largest in the space. Having this more complete product portfolio does lead to competitive advantages within the bank as a whole.

Its latest strategy has been to focus on its payments ecosystem, expand its branch footprint, and pursue new acquisitions and partnerships. The bank has expanded its footprint into several new population centers over the last several years, partnered with State Farm (which can now sell US Bancorp products into its customer network), and is investing in its payments ecosystem in a bid to win more software-centric merchant acquiring business while also cross-selling more payments-related services to its corporate banking clients and vice versa.

The bank’s latest large investment was the acquisition of Union Bank in December 2022. This meaningfully expanded its presence in California, where it will now be roughly the fifth-largest bank. We think the pricing of the deal was attractive, and the real test will be how much US Bancorp can optimize this unit’s revenue generation.

Read more about US Bancorp here.

Banco Bilbao Vizcaya Argentaria

• Morningstar Price/Fair Value: 0.86
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 7.21%

Our list of the best bank stocks to buy now closes with Banco Bilbao Vizcaya Argentaria. Shares of BBVA are trading at a 14% discount to our fair value estimate of $12.30. BBVA earns a narrow moat rating thanks to the powerful competitive position of its Mexican operation. BBVA has a market-leading position in low-cost demand deposits and an edge in digital banking.

We believe that Banco Bilbao Vizcaya Argentaria will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. Due to its significant emerging market presence, investors often perceive BBVA as riskier than other European banks. There are, however, several mitigating factors for any higher country risk. First, BBVA tends to hold a dominant position in the countries it operates in, with significant market shares in low-cost demand deposits, supporting profitability. Second, BBVA is a retail and commercial bank with limited exposure to volatile investment banking activities. Third, diversification across different geographies reduces earnings volatility, and BBVA’s earnings have historically been more stable than most other European banks we cover. We also highlight that BBVA’s decentralized funding model limits its exposure to the equity investment in each subsidiary.

The undoubted crown jewel in BBVA’s portfolio is its highly profitable Mexican operation. BBVA is the clear market leader in the oligopolistic Mexican banking sector, with 40% of Mexicans receiving their salary in a BBVA current account. This enviable position has supported BBVA’s ability to generate ROE north of 20% in Mexico consistently. Geopolitical tension is leading to a reorganization of global supply chains, with US firms looking to bring some outsourced activities closer to home. This trend could become a long-term secular growth theme for the Mexican economy, supporting BBVA’s revenue.

Ultralow European interest rates over the past decade have obscured the underlying profitability of many European banks. Consequently, we believe there is a structural element to BBVA’s higher Spanish profitability.

Read more about Banco Bilbao Vizcaya Argentaria here.

How to Find More of the Best Bank Stocks to Buy

Investors who’d like to extend their search for the best bank stocks can do the following:

• Review Morningstar’s comprehensive list of financial services stocks to investigate further.
• Stay up to date on the financial service’s sector’s performance, key earnings reports, and more with Morningstar’s financial services sector page.
• Use the Morningstar Investor screener to build a shortlist of bank stocks to research and watch.
• Read the latest news about notable bank stocks from Morningstar’s Suryansh Sharma.