The recent surge in bank stocks may have slowed down but analysts are still bullish on the sector’s prospects.
In the last two months of 2020, bank stocks soared, emboldened by hopes of a COVID-19 vaccine rollout, a steepening yield curve, and the resumption of share repurchases. Bank executives also hinted that the worst-case economic scenarios they prepared for may not come to fruition, giving investors new reasons to be bullish.
That exuberance waned over the last few weeks, even as bank earnings came in better-than-expected. While investors are comforted that credit losses won’t be as bad as feared, they worry that loan growth will remain sluggish and net interest margins—while improving—will still be narrow. The emergence of new coronavirus strains and a slower-than-hoped-for rollout of vaccines has also weighed on the sector.
But analysts say that investors may be too cautious on the sector.
“The financial earnings season has blitzed consensus and the sector deserves a better response from markets in our view. We remain Bullish,” Sean Darby, global equities strategist at Jefferies, wrote in a note Tuesday.
He’s not the only one.
Still, the sector overall should do well in 2021. Vivek Juneja, analyst at JPMorgan, also came out in support of the sector on Tuesday. “As vaccinations increase and economic activity starts to rebound, we expect bank stocks to recover and outperform over the course of 2021,” he wrote.
Even with a general bullish sentiment on banks, analysts still have their favorites. Although economic conditions are expected to improve and lift the sector over the year, some banks are better poised to benefit from near-term catalysts. Mortgage banking is expected to continue to rise, JPMorgan analysts wrote Tuesday, as people rush to refinance their mortgages at low rates or try to buy houses. This bodes particularly well for Bank of America (ticker: BAC) and Citizens Financial (CFG), which were up 3.4% and 3.7% in Tuesday’s trading, respectively.
Bank stocks were paying attention. The KBW Bank Index (BKX) popped 2.7% in early trading Tuesday, outpacing the 1.5% advance in the S&P 500.
