Top 3 Bank Stocks to Watch as Fed Rate Cuts Loom

Key Points

• Five consecutive quarters of expanding net interest margin positions Fifth Third Bancorp for further upside as mid-market lending continues to strengthen.
• Comerica is one of the most asset-sensitive U.S. banks, with 9% projected EPS growth and a nearly 5% dividend yield backed by robust capital.
• Citizens Financial Group repositioned its balance sheet, and analysts are forecasting nearly 27% EPS growth, making this undervalued stock a strong rate-cut beneficiary.

According to the CME Fed Watch tool, the odds that the Federal Reserve will cut interest rates in July are only about 20%. However, those odds move to around 68% in September. And by October, many analysts factor in a 50% chance that rates will be 50 basis points (0.5%) lower than they are today. 

Investors are seeing that price action in the market today. Many investors want to position themselves ahead of the rate cuts so they can capture the gains. That’s a key reason why they’re climbing the wall of worry and buying stocks. 

Rate cuts will be bullish for the broader market. However, they could be particularly bullish for finance stocks, specifically bank stocks. That’s because higher interest rates impact the yield curve. 

The yield curve is a visual representation of the spread between long-term and short-term interest rates. When the Federal Reserve cuts rates, short-term borrowing rates move lower. But longer-term interest rates (e.g., Treasury yields) may stay firm or may even rise on the expectation of higher inflation or more growth. 

That means the yield curve steepens. That’s likely to be bullish for these three banks that benefit when their net interest margin (NIM) expands.

Fifth Third Bancorp Stock: Rate Cuts Will Help Already Expanding Margins

In Fifth Third Bancorp’s NASDAQ: FITB first-quarter earnings report, the company cited that its NIM had expanded for the fifth consecutive quarter. Much of that was due to the company’s diversified loan portfolio, which is reflected in the bank’s average loan portfolio being up 3% sequentially and year-over-year (YOY). 

Another bullish sign for the company is that some of that loan growth is taking place in the mid-market commercial space. Elevated interest rates have weighed down this area, but it’s also one of the areas with the most growth potential when rates begin to move lower.

The quality of Fifth Third’s loan portfolio is reflected in its Common Equity Tier 1 (CET1) capital ratio of around 10.5%, which is 36% higher than the 7.7% ratio requirement. The company’s recent announcement to buy back up to 100 million shares adds to the bullish outlook for FITB stock. 

The Fifth Third analyst forecasts on MarketBeat have a consensus price target of $47.53 on the stock. That's a 17.4% increase, along with a dividend yield of 3.66%, and has increased for 14 consecutive years. 

Comerica Stock: Its Biggest Risk Could Turn Into a Big Reward

Comerica Inc. NYSE: CMA is one of the nation’s most asset-sensitive banks. That means its earnings rise quickly when loan yields increase faster than deposit costs. The opposite is true as well. Muted loan activity is one reason earnings per share (EPS) are down YOY.

The company expects that to change in the second half of the year, especially in some key markets. However, management remarked that it still projects full-year 2025 average loans to be down between 1% and 2%.

Like Fifth Third, Comerica has a strong CET1 ratio of 12.5%. This should stabilize the top and bottom lines while the bank waits for loan activity to increase.

EPS is expected to grow by over 9% this year. That may not be fully priced into CMA stock. Analysts give the stock a consensus price target of $61.95, which is a 7.3% gain. Comerica also offers a high-yield 4.92% dividend.

Citizens Financial Group Stock: The Bank Is Positioned for Lower Rates

In the last several quarters, Citizens Financial Group Inc. NYSE: CFG has been proactive in repositioning its balance sheet away from low-yield securities and into higher-yielding commercial loans. That should increase earnings growth when rate pressures abate.

The bank’s CET1 ratio of 10.6% also reflects its solid financial position. Analysts are projecting EPS growth of around 27% in the next 12 months. That's nearly three times CFG stock’s forward price-to-earnings (P/E) ratio of around 10x.

A spread like that is one reason to believe CFG stock could be undervalued. Another could be the bank’s announcement that it was increasing its share buyback authorization to $1.5 billion.

The CFG analyst forecasts on MarketBeat give the stock a Moderate Buy rating with a consensus price target of $47.89, which is just below its 52-week high. Citizens Financial also has a solid dividend with a current yield of 3.93%.