MacroResearchBoard

U.S. Bank Stocks: Has Godot Finally Arrived? – January 25, 2021

After a decade-long period of underperformance with occasional brief bouts of strength, U.S. bank stocks have soared in recent months, boosted by positive vaccine news, a steepening yield curve, and the Fed’s decision in December to reverse the ban on share buybacks for the largest banking institutions.

A just-published report analyzed the outlook, focusing on the main drivers of bank earnings in the year ahead:

• The steep rally in U.S. bank stocks may be due for a pause, but the cyclical outlook is positive.
• Relative valuations are attractive and there is plenty of room for a meaningful re-rating as credit risks diminish and underlying fundamentals improve.
• The rebound in bank relative earnings will initially be mostly driven by the release of loan loss reserves and ongoing solid performance of non-interest income.
• As the economic recovery progresses, loan demand should gradually reaccelerate and contribute tailwinds to bank revenues and earnings.
• The steepening of the yield curve will help marginally improve net interest margins (NIMs). A more meaningful expansion of NIMs, however, is incumbent on a rise in short-term interest rates, which will only develop after the economic recovery becomes much more entrenched.

U.S. bank stocks remain among our favorite plays on the economic recovery, and we are bullish on the 1-2 year prospects for the sub-group and recommend adding to exposure on price weakness.