Why Bank of America, US Bancorp and Synovus Financial rose more than 13.7% in February
Actions of Bank of America (NYSE: BAC), US Bancorp (NYSE: USB), and Synovus Financial (NYSE: SNV) rose 17.1%, 16.7% and 13.7%, respectively, in February, according to data provided by S&P Global Market Intelligence. All three banks had released their fourth quarter reports in late January and there hadn’t been much company-specific news in February. The large monthly movement was therefore largely due to the same macroeconomic factors.
The gains were no less intriguing, however, and if the economy continues to improve in the same direction, more gains could be ahead for these rock-solid ones. bank stocks.
The common thread between these three banks is their dependence on interest rates and the yield curve. While America’s largest banks are widely diversified among lending, investment banking, sales and commerce, and wealth management, Bank of America is perhaps the most responsive to direct lending among the four largest banks. American.
US Bancorp and Synovus also derive a large portion of their income from commercial banking and loans, although each has different proportions of different types of loans, split between consumer loans, business loans, and commercial real estate. . Synovus has a higher proportion of potentially problematic commercial real estate loans than the others, which may be why it has grown less than the other two bank stocks.
Yet a large portion of each of these banks’ income comes from loans and fee-based income from expenses such as credit cards and debit cards, making them sensitive to overall economic conditions. And the economic outlook for the United States has improved greatly throughout February.
In particular, it appears that the economy is heading for a faster reopening than previously thought. The Biden administration is ahead of its goals of delivering 100 million doses of vaccine in its first 100 days; in fact, after the recent approval of the Johnson & johnson (NYSE: JNJ) vaccine, the administration shifted the immunization schedule for all Americans to late May, from the original target date of late July.
In addition, it appears Congress is on track to pass the US $ 1.9 trillion bailout, which will inject a much needed stimulus into the economy while it is still partially closed, and is expected to ensure faster recovery once things reopen.
A faster reopening with more stimulus from the government recently led to an increase in long-term bond rates, a benchmark against which many banks are pegging their lending rates. Yet at the same time, the Federal Reserve has pledged to keep short-term interest rates at zero for the foreseeable future, until the economy returns to full employment and inflation returns to zero. its target of 2%.
As banks “borrow short” and “lend long term,” a steeper yield curve should result in higher net interest margins for lenders. Given the heavy loan mix of the three banks, it’s no wonder these three stocks rose in February.
There is also reason to believe that the recent upward movements in these bank stocks could continue.
First, thanks to fiscal stimulus and increased unemployment benefits adopted throughout 2020, bank loans have held up much better than many thought at the start of the pandemic. In response, the Federal Reserve announced in late December that it would begin allowing banks to buy back their shares again, if the banks meet certain criteria of soundness. More share buybacks should help boost bank profits, as share buybacks will increase earnings per share in the future, given the same amount of net income.
Second, banks are generally value stocks which trade at lower earnings multiples than much of the market. Rising long-term interest rates also mean that investors will have to discount future profits more than they did when long-term rates were lower. This means that investors can look more towards the cheaper stocks that make more profits today, but may have lower growth, compared to the high-growth but unprofitable tech stocks that have dominated 2020. In fact, we’ve already seen this change start in recent weeks:
Despite their recent moves, it’s entirely possible that bank stocks will continue to outperform in 2021 as the economy returns to normal. For heavily indebted and economically sensitive banks, economic reopening combined with fiscal stimulus is a recipe for continued gains in 2021.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.