A tough year for banks, stocks in this sector recently rose on encouraging vaccine news.
Based on late-stage Phase 3 data, mRNA vaccine developers Moderna and Pfizer have shown their vaccines to be highly effective, offering a glimmer of light at the end of this dark tunnel. Normalcy returning sometime in 2021 in America seems very possible. And it is normalcy in economic life that banks, especially traditional lenders, are built to bank on.
Now, low-interest rates are one thorn in the side of profitability that may stick around for a while after the pandemic. However, thanks to “better economic prospects” on the vaccine news, the 10-year Treasury note’s rate will likely rise above 1% by the end of the year, according to the personal finance advice and business forecast firm Kiplinger. Still, relatively low rates are expected for some time. That said, the banks are back.
Sean Darby, a global equity strategist at Jefferies boosted his outlook on American banks and consumer financial stocks from "modestly bullish" to "bullish.”
“Improved visibility towards a successful coronavirus vaccine, easier lending conditions, little evidence of deflation and a sentiment switch from growth to value will lift U.S. bank shares through 2021, he said,” as cited by Seeking Alpha.
But if you missed out on the recent rally, don’t worry, as there are plenty of banks that you can find solid value in.
With most shares in the banking space down year-to-date, here are some stocks you should take a look at despite recent gains:
1.Bank of America (NYSE: BAC)
Market Capitalization: $231.93 billion
YTD Return: -24.15%
Since Pfizer broke its vaccine news, shares of Bank of America have leaped 10%. It is still down from its pre-virus high, and at these levels BAC still represents a value trade.
While its third-quarter results were mixed, one positive was that its consumer loans managed to gain 5% year-over-year, which isn’t easy to do amid an economic crisis. A jump in consumer deposits (not uncommon in a recession) jof 21% from the same period last year to $861 billion was also a birght spot. As was digital and mobile banking, which saw user increases of 3% and 7%, respectively, in the period.
But most importantly, Brian Moynihan, the chief executive officer of BAC, said the worst is over for the company, sparking more confidence for investors.
With a PE ratio of just 13.21, I still think there could be great value here for investors. I would look to buy it at its current trading levels.
2. JPMorgan Chase & Co. (NYSE: JPM)
Market Capitalization: $349.32 billion
YTD Return: -16.65%
The safest and best play in the banking space right now might be JPMorgan.
While banks including the company have been under pressure in this beaten-down economy, JPMorgan’s third-quarter performance on an earnings basis was impressive. In the period, JPMorgan posted a profit of $9.4 billion, which was higher than the figure it posted in the fourth quarter of 2019 in a better-shaped economy.
Another strong suit of JPMorgan is what the company refers to as its “Fortress balance sheet.” In the third quarter, JPMorgan reported a CET1 capital of $198 billion with a ratio of 13%.
Not that this would come as a huge surprise but credit agency Moody’s Investors Service affirmed JPMorgan’s rating outlook as “stable” earlier this week.
The firm wrote, “As economic uncertainty recedes, we expect JPM to resume share repurchases and reduce its current buffers over regulatory requirements,”
Further, “JPM is also very liquid, benefitting from the firm's diversified and growing deposit base and the healthy weighted average maturity of its long-term debt. The firm reported a Liquidity Coverage Ratio of 114% at 30 September 2020.”
Since the big vaccine news earlier this, shares of JPMorgan are up 12%. But with a stock that trades at just less than 15 times its earnings—there could be still a lot left on the table for investors.
However, it’s important to note that a bet on this stock is a bet against one of the world’s most successful investors, Warren Buffet. The billionaire investor and chief executive officer of Berkshire Hathaway (NYSE: BRK-A) cut his stake in the banking giant by more than 60% in August.
3. U.S. Bancorp (NYSE: USB)
Market Capitalization: $63.3 billion
YTD Return: -28.23%
Another stock in the banking space that could provide solid value for investors is U.S. Bancorp.
While U.S. Bancorp didn’t come up with the blowout earnings that JPMorgan came out with in the third quarter, it still beat expectations. Its net income came in at $1.58 billion, or 99 cents per share, above 91 cents the FactSet consensus was calling for.
When compared to the five biggest banks, U.S. Bancorp has the largest return on assets with 1.17% and the best efficiency ratio of 56.8%, which tracks expenses in relation to earnings. Also, among the five largest banks, it just trails JPMorgan with its return on equity at 12.8%.
In addition, among the other two banks we listed, U.S. Bancorp has the highest dividend yield of 3.89%.
With the stock just carrying a PE ratio of 14.12, U.S. Bancorp is another potentially undervalued bank.
Betting on Banking
Despite some recent gains, this is still a time to consider the banking sector. with most of the bank stocks down YTD. Long-term, the sector is a play, but it’s important to note short-term uncertainties. Uncertainties like increased regulation should Senate turn in favor of Democrats come January.
“We do not expect a straight line up for financial stocks, and caution that challenges remain, including still low interest rates and increased regulation,” Frederick Cannon, the director of research at Keefe, Bruyette & Woods, wrote in a note, as cited by Barron’s.
He continued “To be sure, absent a blue wave in last week’s election, few expect sweeping regulatory changes for banks.”