The Best Bank Stocks to Buy

After enduring a bumpy 2023, the financial services sector appears to be on a smoother path this year.

So far in 2024, the Morningstar US Financial Services Index is outperforming the Morningstar US Market Index, up 13.15% compared with 11.25% for the benchmark.

The financial services sector looks 1% overvalued as of May 20, 2024.

Suryansh Sharma, Morningstar’s equity analyst covering bank stocks, sees reasons for optimism. “Our outlook is generally positive from a macroeconomic and political standpoint for the US banking system,” he says. “The US is still the world’s leading democracy, has maintained innovation and technological supremacy while increasing gross domestic product at a steady pace for years, and maintains the world’s reserve currency, all of which contribute to banking stability. From a systemic standpoint, we believe the US banking system has improved over the past decade, as capital levels supporting the banking system are at all-time highs. Further, regulation has become considerably stronger in the past several years.”

Our list of 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 May 20, 2024.

The 5 Best Bank Stocks to Buy Now

1. Lloyds Banking Group LYG
2. Comerica CMA
3. US Bancorp USB
4. Truist Financial TFC
5. The Toronto-Dominion Bank TD

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 May 20, 2024.

Lloyds Banking Group

• Morningstar Price/Fair Value: 0.72
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.94%

Lloyds Banking Group is the cheapest bank on our list of best bank stocks to buy now. It enjoys cost advantages in the form of a sizable deposit base establishing a low-cost and sticky funding source, as well as low operating costs. Shares of Lloyds are trading at a 28% discount to our fair value estimate of $3.90.

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.

Comerica

• Morningstar Price/Fair Value: 0.75
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 5.18%

Comerica features superior deposit costs and business relationships, which we think should result in returns that exceed its cost of equity. Shares of this affordable bank stock are trading at a 25% discount to our $73.00 fair value estimate.

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica’s largest, with roughly one third of the bank’s loans now based there.

The bank has concentrations in the commercial real estate market, dealer floor plan lending, and mortgage banking. Comerica has a relatively small energy portfolio, which we expect will remain at 5% or less of the total loan book. The bank also has two business units primarily focused on serving institutional investors: the technology and life sciences unit and the equity fund services unit. Overall, the bank has a diversified set of commercial-focused lending and advisory segments.

Comerica remains very leveraged to interest rates, as the majority (roughly 80%) of its loans are adjustable-rate (although the bank has hedged many of these exposures for the time being). An acceleration in funding costs and some deposit outflows have brought the benefits of the current rate cycle to a halt. While the bank’s sticky deposit base from its core commercial clients has been called into question recently, the bank is still just getting back to normalized loan/deposit ratios, and the bank was able to return to deposit growth in the second quarter.

While earnings growth is coming to a halt, Comerica has been a beneficiary of the current rate cycle, with normalized returns on tangible equity hitting the high teens. While current normalized returns are set to fall to the low-double-digit percentage range, we still think the bank will be fine. The flip side of this rate cycle is that the bank may be hurt less by rate cuts than in the past.

US Bancorp

• Morningstar Price/Fair Value: 0.78
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 4.73%

US Bancorp, next on our list of the best bank stocks, has been one of the most profitable regional banks we cover. Shares of US Bancorp are trading at a 22% 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 business 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, which closed 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.

Truist Financial

• Morningstar Price/Fair Value: 0.80
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 5.20%

Shares of Truist Financial are trading at a 20% discount to our fair value estimate of $50.00. Truist earns a narrow moat rating thanks to superior credit efficiency, the potential for superior operating efficiency, and a decent cost of deposits. Truist is one of the largest regional banks under our coverage, and we see this scale driving above-average operating efficiency, further bolstering its moat.

Truist is one of the larger regional banks in the US and its presence is largely concentrated in the east and southeast. Truist has many of the typical offerings of a bank, including retail and commercial banking; however, it also has some more unique parts as well, including its insurance brokerage unit (roughly the seventh-largest broker in the US), a sizable investment banking unit, wealth and advisory services, and its LightStream digital lending platform.

Truist has been through a number of changes over the last couple of years, not least of which was the large merger between BB&T and SunTrust in late 2019. While the combination was aimed at forming one of the best-performing regionals in the US driven by some of the best scale among the US regional banks, the bank has struggled to hit some of its original efficiency and profitability targets. We still like the competitive positioning of the franchise, as the bank has a uniquely complete platform across retail, commercial, advisory, wealth, and insurance. The bank has also made a number of bolt-on insurance acquisitions (multiple smaller acquisitions in 2020, Constellation Partners in 2021, and BenefitMall and Bank Direct Capital Finance in 2022) and added the consumer point-of-sale lender Service Finance, which focuses on homeowners and home improvement projects. However, we’re still waiting to see if Truist can start hitting profitability numbers that put it at a more elite level.

2023 was set to be one of the "cleaner" years for Truist in recent memory from an earnings standpoint, as recent acquisitions reach their full-year effect and one-time charges from the BB&T and SunTrust merger finally fade away. However, the bank is now set to record some one-time charges related to its insurance unit. The financials have been complex during the previous several years, and it looks like 2023 will still have its own complexities.

Truist is facing some more pressure on profitability than some peers in the current environment. We still expect the bank to grow revenue slightly in 2023, cover the dividend, build capital, and ultimately persevere.

The Toronto-Dominion Bank

• Morningstar Price/Fair Value: 0.83
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 3.84%

Closing our list of the best bank stocks to buy, The Toronto-Dominion Bank is the number-one credit card issuer in Canada. This cheap banking stock trades at a 17% discount to our fair value estimate of $69.00.

Toronto-Dominion is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The bank derives approximately 55% of its revenue from Canada and 35% from the United States, with the rest from other countries. Toronto-Dominion has done an admirable job of focusing on its Canadian retail operations and growing into number-one or -two market share for most key products in this segment. The bank also has number-two market share for business banking in Canada. With over CAD 400 billion in Canadian assets under management and top-three dealer status in Canada, and being the number-one card issuer in Canada, Toronto-Dominion should remain one of the dominant Canadian banks for years to come.

Toronto-Dominion has also established a significant presence in the US by having the most branches in the US among Canadian banks as well as a 12% ownership stake in Charles Schwab. While we like the higher exposure to more growth in the US, the segment has lower returns on equity than the Canadian segment, partially because of goodwill but also partially because returns are naturally lower on average. We also like Toronto-Dominion’s positioning as a major discount brokerage player because we believe this industry is ripe for growth as investors seek out lower-cost alternatives, and the bank could leverage its knowledge of the industry for future growth in Canada.

The bank has taken a number of charges (such as integration charges, restructuring charges, and more). Many of these have been related to acquired card portfolios. We expect that as these card relationships mature, the bank should be well-positioned in what is a higher-return business. Toronto-Dominion will no longer acquire First Horizon. We did not feel the deal added any value, so this development does not impact our view of the bank. Meanwhile, the acquisition of Cowen was recently closed. Expect fairly messy earnings (lots of one-time items) for the next year, and we also would not be surprised if the bank sees some fallout related to recent regulatory inquiries into the bank’s AML/BSA compliance.

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.
• Use the Morningstar Investor screener to build a shortlist of bank stocks to research and watch.
• Read the latest news about notable financial services companies from Morningstar’s Suryansh Sharma.