Some of the world's largest financial institutions are experiencing a vigorous recovery after dealing with the severe blow of the COVID-19 pandemic.
U.S. bank stocks far outperformed the benchmark this year. Investors are now bullish on lenders, believing the worst is over and the economic reopening will spur revenue growth.
It is up about 40% so far this year, led by JPMorgan Chase (NYSE :), Goldman Sachs (NYSE 🙂 and Bank of America (NYSE :). During the same period, the S&P 500 gained only 10%.
After this impressive achievement, many investors feel that they have already missed this financial boat.
That observation may be true for some individual lenders, but the overall macro picture still looks quite favorable for large lenders who have diversified income streams and are well positioned to take advantage of both low and gradually rising interest rates.
Goldman Sachs Weekly Chart.
One of the biggest factors that could bring more income in the coming months is the pent-up demand for credit that was hammered during the pandemic. From individual borrowers to large corporations, 2020 was the year when spending plans were dropped as lockdowns forced potential borrowers to keep cash and cut costs.
Bank Of America Weekly Chart.
This situation is unlikely to continue if the US economy fully reopens as planned this year. Coupled with massive government infrastructure spending and a gradual winding down of monetary stimulus measures, banks could see demand for credit increase significantly over the remainder of 2021. mergers and acquisitions and share offerings – continue to grow.
and have consistently demonstrated during the pandemic that they can adapt to all economic and market conditions and find a way to exceed expectations. Last year, when overall economic activity was extremely low, these lenders took advantage of the volatility of the financial markets to make more money through their investment units.
Contributing to this optimism is the accelerated pace of, indicating that the Federal Reserve will likely be forced to raise interest rates earlier than expected to ward off price increases. Higher rates allow banks to charge more to borrowers, increasing credit margins on a variety of products from credit cards to mortgages.
Even with this year's strong performance, banking stocks are still attractive compared to the frontier market. Banks are trading at about 13 times their expected 2022 earnings, while the S&P 500 is trading more than 22 times, a bigger difference than the historical average.
According to Deutsche Bank analysts cited in a Wall Street Journal report, the market has not yet priced in potential economic strength for 2023 and 2024, which could further increase bank revenues and generate 25-50% gains in their stock prices. during that time.
Bottom Line
The economic backdrop is still favorable for banks' earnings growth this year, making their stocks attractive even after a strong run.
Investors looking for some bank exposure may want to consider adding solid names like JPM, Goldman Sachs and Bank of America to their portfolios. These top lenders are, because of their diversified business models, in a better position to outperform smaller regional players.
