The Best Bank Stocks to Buy

The financial-services sector—and most especially banks—were no doubt happy to see the back of 2023 and move into a new year.

The Morningstar US Financial Services Index significantly underperformed the Morningstar US Market Index in 2023, up 16.39% compared with 25.63% for the benchmark. Three large bank failures early in the year, followed by repeated interest-rate hikes that added to bank interest income but limited borrowing for consumers, made 2023 uniquely challenging for bank stocks.

Despite recent difficulties among regional banks connected to high commercial real estate exposure, financial-services stocks are currently outperforming the US Market Index this year to date. 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 U.S. banking system,” he says. “The U.S. is still the world’s leading democracy, has maintained innovation and technological supremacy while increasing GDP at a steady pace for years, and maintains the world’s reserve currency, all of which contribute to banking stability.”

He adds: “From a systemic standpoint, we believe the U.S. banking system has improved over the last 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, and are trading near or below our fair value estimates as of Feb. 20, 2024.

The 5 Best Bank Stocks to Buy Now

1. Bank of America BAC
2. Royal Bank of Canada RY
3. The Toronto-Dominion Bank TD
4. U.S. Bancorp USB
5. Wells Fargo WFC

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 Feb. 20, 2024.

Bank of America

• Morningstar Price/Fair Value: 0.97
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 2.82%

Bank of America, the second-largest bank in the United States, with more than $2.5 trillion in assets, tops our list of the best bank stocks to buy now. It boasts a wide moat and an improved balance sheet. Shares are trading almost even with our $35.00 fair value estimate.

Bank of America, the second-largest bank in the United States, with more than $2.5 trillion in assets, tops our list of the best bank stocks to buy now. It boasts a wide moat and an improved balance sheet. Shares are trading almost even with our $35.00 fair value estimate.

After years of issues following the financial crisis of 2008, Bank of America has emerged as one of the preeminent U.S. banking franchises. The bank has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

We believe that scale and scope advantages are increasingly important as the role of technology in banking grows. Bank of America is seeing increasing mobile adoption, has access to data on millions of customers, and has one of the largest tech budgets in the industry. Given the scalability of these platforms, we believe these factors will only matter more as the industry progresses.

Bank of America has been investing in organic growth initiatives across its franchises. The bank has opened hundreds of new financial centers across the U.S. over the last several years in an attempt to build its client base across its product offerings. However, the bank’s expenses have started to creep up for the last several years, and we expect 2023 will be another year of increases above the longer-term target of 1%-2% annual growth. When and if the bank can get back to a lower expense growth rate will be a key for improving the bank’s efficiency.

Meanwhile, the bank isn’t the only one investing for future share gains, so the space remains as competitive as ever, and we don’t see Bank of America quite catching up with rival JPMorgan. Even so, with its scaled and integrated retail and commercial offerings, Bank of America remains in an enviable competitive position. During the recent banking turmoil, deposit outflows were not a serious issue, and the bank remains solidly profitable, with returns on tangible equity consistently near or above 15%. While the bank took more duration risk than peers in its securities portfolio, regulatory capital levels and profitability remain solid.

Royal Bank of Canada

• Morningstar Price/Fair Value: 0.97
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 3.09%

The first of two Canadian banks on our list of the best bank stocks to buy, Royal Bank of Canada earns two thirds of its revenue from its home country. Its distribution networks are arguably the most dominant in Canada, and RBC features the largest amount of assets under management among the Canadian banks. The stock is trading near our fair value estimate of $101.00.

Royal Bank of Canada 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 two thirds of its revenue from Canada, with the rest primarily coming from the United States. It has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. We believe RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macro backdrop pressures earnings growth in the medium term.

We expect Royal Bank of Canada to remain a steady player in its retail and commercial Canadian banking operations. It also remains a major player in global capital markets. We expect this segment to continue to be a strong contributor to net income, and if anything, capital markets have been countercyclical for the bank during the pandemic as earnings have soared for the unit.

The wealth-management segment also earns strong returns on equity, and large inflows have led to a top market position. RBC remains a top asset manager and gatherer in Canada, and is also experiencing outsize growth from City National, where cross-selling and client integration efforts have gone well. The banks’ distribution networks are arguably the most dominant in Canada, and the bank has the largest amount of assets under management among the Canadian banks.

We like RBC’s growth strategy in the U.S. through City National, focusing on wealth and commercial clients. We believe this is a much more focused strategy than its previous attempts at growth in the U.S., and it is paying dividends. While exposure to the U.S. isn’t as great right now given some of the industry turmoil, deposit and earnings pressure has been manageable.

We are relatively neutral on RBC’s acquisition of HSBC Canada. It is a decent franchise with a decent client base and will allow RBC to gain some incremental share in Canada, however, we believe client retention risks, the price paid, and regulatory risks make this a roughly neutral move.

The Toronto-Dominion Bank

• Morningstar Price/Fair Value: 0.87
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 3.80%

The second Canadian bank on our list, The Toronto-Dominion Bank is also a significant player in Canada; in fact, it’s the number-one credit card issuer in the country. This cheap banking stock trades at a 13% 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 U.S. by having the most branches in the U.S. among Canadian banks as well as a 12% ownership stake in Charles Schwab. While we like the higher exposure to more growth in the U.S., 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. TD 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.

U.S. Bancorp

• Morningstar Price/Fair Value: 0.80
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 4.72%

U.S. Bancorp is the cheapest bank on our list of bank stocks to buy, and it has been one of the most profitable regional banks we cover. Shares of U.S. Bancorp are trading at a 20% discount to our fair value estimate of $52.00.

U.S. Bancorp is the largest non-GSIB in the U.S. 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 U.S. 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 U.S. 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 expands 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 U.S. Bancorp can optimize this unit’s revenue generation.

Wells Fargo

• Morningstar Price/Fair Value: 0.94
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 2.69%

Wells Fargo closes our list of the best bank stocks to buy now. It is one of the largest U.S.-based banks by assets and has leading share and operations in many of the key areas in which it competes. Shares are trading slightly below our fair value estimate of $55.00.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and we don’t see this restriction coming off in 2023. Wells Fargo has years of expense-saving projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm’s existing franchises, including expanding its middle-market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016.

We’re already getting glimpses of the transition to offense from defense with the launch of multiple new card products, advisors not declining for the first time in years in the fourth quarter of 2022, and $2.2 billion of incremental internal investments in 2023 (a step up from the $1.7 billion goal from 2022). Even so, while the bank is making progress, we expect a multiyear journey remains.

Despite its issues, Wells Fargo remains one of the top deposit gatherers in the U.S., with the third most deposits in the country behind JPMorgan Chase and Bank of America. Wells Fargo has one of the largest branch footprints in the U.S., excels in the middle-market commercial space, and has a large advisory network. We believe this scale and the bank’s existing mix of franchises should provide the right foundation to eventually build out a decently performing bank. Wells Fargo may not reach the types of returns and efficiency that peers like JPMorgan and Bank of America have achieved, but we expect it to remain larger than any other regional bank and stay competitive as such. We’re also gaining confidence that CEO Charlie Scharf is guiding the bank in a new and positive direction.

For now, the bank needs to consistently hit the expense targets it is laying out (it achieved this in 2021 and 2022) and keep making progress with regulators. We’re hoping for the asset cap removal by the end of 2024, but this remains highly uncertain.

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.