NEW YORK (TheStreet) -- With a composite gain of 13.42%, according to Fidelity Investments, 2014 was good year for bank stocks. The industry has outperformed both the Dow Jones Industrial Average and S&P 500 , which have gained 6.8% and 11%, respectively.
In fact, the 7.62% gain in the KBW Bank Index (I:BKX) , which also outpaced the Dow's performance, is another example of how well investors have done in 2014 by depositing their faith in banks. But can this continue?
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Let's first take a look at the four major banks.
The chart below shows how volatile Citigroup (C) (up 5.4%), Bank of America (BAC) (up 13%) and JPMorgan Chase (JPM) (up 5.8%) have traded in 2014.
At various times of the year, each were either up or down by double-digit percentage points. Well Fargo's (WFC) stock movement, meanwhile, has been fairly consistent. By being up 21% for 2014, Wells Fargo's corporate slogan "Together we'll go far" was proven true.
Can it last in 2015? Here's why it is tough to bet against Wells Fargo.
Already the largest bank by market cap, Wells Fargo is arguably the safest because unlike Citigroup, Wells Fargo is not overly exposed to the volatile European market. Also, Wells Fargo, which is the No. 1 mortgage originator in the U.S., is unburdened by the investment banking and high-risk trading business that has hurt JPMorgan Chase.
Part of the reason these banks are ending the year on a high note is investors are betting on the likelihood of rising interest rates next year. Interest rates have an impact on the credit market, specifically loans. In a more favorable interest rate environment, (some) banks should find it easier to generate higher profits from higher revenue and fees.
It's not just the big banks that will prosper, however. Investors can expect smaller regional banks including BB&T (BBT) and Fifth Third Bancorp (FITB) , which posted 2014 gains of 3% and 4.2%, respectively, to deliver more gains in 2015. Take a look at the chart below.
In the case of Fifth Third, which ranks twenty-first among the largest banks in the U.S. by assets, it has become a top pick among many analysts. Fifth Third has a consensus rating of buy and a high 12-month price target of $25. The bank has increased loans 4% year over year in the most recent quarter while delivering a 7% year-over-year jump in average core deposits. This regional banking power is one to keep an eye on in 2015.
Same with Pittsburgh-based PNC Financial (PNC) . PNC is rarely mentioned when discussing some of the best-run banks on the market but it should be. Its shares are up 15.5% this year and the bank is already positioning itself to capitalize on a better rate environment if it comes.
In a filing with the Securities and Exchange Commission, PNC said it can generate a 2% increase in net interest income in 12 months if interest rates rise by 1%. By the second year of a 1% rate hike it thinks it can produce an additional profit of 6.8%. There's no guarantee that rates will rise, however. Nonetheless, it enforces how important rates are to bank profits.
But there are plenty of other reasons to expect banks to do well in 2015. Lending continues to improve each quarter, justifying some of the valuations investors have assigned. And there's no substitute for consistent execution, regardless of what the Federal Reserve does with rates.
And with new banking regulations tightening banks' ability to make money on fees, banks that have strong geographic retail presence and are less reliant on fees should do well. For this reason, Huntington Bancshares (HBAN) and U.S. Bancorps (USB) should be watched in 2015.
TheStreet Ratings team rates WELLS FARGO & CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate WELLS FARGO & CO (WFC) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, expanding profit margins and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
You can view the full analysis from the report here: WFC Ratings Report