Midcap bank stocks have dropped by about 15% since their November highs, but Morgan Stanley sees an attractive entry point as several positive catalysts are expected in the coming year. Improved core deposit growth, better-than-expected deposit pricing, and the ability to pay down higher-cost funding could boost net interest margins in the next two quarters, according to 4.4-star analyst Manan Gosalia. Banks have also cut promotional certificate of deposit rates by around 0.65% since June, which should help alleviate funding costs.
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Morgan Stanley predicts that fixed-rate loans and securities will continue to increase in value through 2025, thanks to favorable long-term rate trends. In addition, slower loan growth is giving banks the chance to pay off costly funding sources like brokered deposits. By mid-2025, loan demand is expected to pick up and boost net interest income, which accounts for about 80% of midcap bank revenues. This could pave the way for strong growth heading into 2026.
An improved environment for bank mergers and acquisitions could also help support valuations. Among the banks rated Overweight by Morgan Stanley, M&T Bank (MTB) and East West Bancorp (EWBC) saw the sharpest recent declines. Other top picks include Prosperity Bancshares (PB), UMB Financial (UMBF), Cadence Bank (CADE), and Huntington Bancshares (HBAN).
Which Midcap Bank Is the Best Buy?
Overall, out of the two stocks mentioned above, Wall Street analysts think that MTB stock has the most room to run. In fact, MTB’s price target of $226.84 per share implies almost 20% upside potential.
