- Jefferies raised its rating on financial stocks to “bullish” from “modestly bullish” on Wednesday, citing loosened lending conditions and new hopes for a near-term vaccine.
- Bank stocks are among the most sensitive to macroeconomic trends, and the latest COVID-19 surge “is likely to lead to some weaker economic data and potentially higher impairment charges,” the team led by Sean Darby said in a note.
- Yet the firm’s October survey of Federal Reserve senior loan officers showed lending conditions were less tight than they were in July, signaling banks are preparing for an economic rebound.
- And if a vaccine is distributed in early 2021, “then the banks would have to naturally bring down their reserves,” the strategists added.
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Bank stocks are among the most exposed to a new wave of coronavirus infections, but Jefferies strategists think now is the time to pile in.
Financial sector profits nosedived early in the pandemic as firms diverted profits to bolster reserves for soured loans. Banks have so far set aside roughly $110 billion for loan losses, and that sum now serves as a “huge safety cushion” as the economy continues to recover, the team led by Sean Darby said Wednesday. With revenues trending higher and loss provision costs falling, bank stocks might be rebounding from their bottom, the strategists added.
Jefferies lifted its rating for the financial sector to “bullish” from “modestly bullish.” While soaring COVID-19 cases and an absence of new stimulus “is likely to lead to some weaker economic data and potentially higher impairment charges,” vaccine hopes, easier lending conditions, inflation, and a value rotation will boost bank stocks throughout 2021, the team said.
The team turned more bullish toward the sector in October as economic data improved and breakeven inflation expectations closed in on pre-pandemic levels. A lack of vaccine progress and the upcoming US presidential election kept Jefferies from giving a more optimistic outlook, but both variables have since given way to sector-friendly outcomes.
Bank stocks already rallied higher in recent sessions as vaccine updates from Moderna and Pfizer drove a mass shift to value stocks. Spiking infection rates and the continued lack of stimulus did little to dent the sector’s upswing, and relaxed lending standards may be the culprit, according to the strategists.
An October survey of Federal Reserve senior loan officers showed a 38% net tightening of commercial and industrial loans. That’s down from a net 71% in a July survey, suggesting banks are already positioning for a recovery.
Additionally, progress on a viable COVID-19 vaccine could allow banks to recoup some of the precautionary costs made earlier in the pandemic, Jefferies said.
“If a vaccine or herd immunity were to be reached then the banks would have to naturally bring down their reserves,” the team added.
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