{"id":9531,"date":"2021-04-26T05:43:30","date_gmt":"2021-04-26T05:43:30","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9531"},"modified":"2022-02-26T13:05:52","modified_gmt":"2022-02-26T13:05:52","slug":"3-reasons-2021-looks-good-for-the-banking-sector","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/3-reasons-2021-looks-good-for-the-banking-sector\/","title":{"rendered":"3 Reasons 2021 Looks Good for the Banking Sector"},"content":{"rendered":"\n<p>Around this time last year, the outlook for U.S. banks was\ntenuous at best. The global economy was shutting down, and virtually no one\nunderstood the implications for credit, loans, liquidity, mortgages, and other\navenues for banking revenue. Banks went into full defense mode.<\/p>\n\n\n\n<p>For years, banks had been preparing for another crisis, and\nhere it was. New regulations and Fed stress tests compelled banks to boost\ncapital ratios and to make emergency plans. Many were ready for the crisis. But\ngiven the uncertainties of the pandemic, many banks went a step further and set\naside tens of billions of dollars to boost capital reserves even more,\nanticipating another wave of loan losses and deteriorating credit conditions. Many\nbanks feared the worst. <\/p>\n\n\n\n<p>Fast forward to today, and the actual impact of the crisis\nwas far less than anticipated. In fact, many banks have thrived over the last\nyear, thanks in part to the U.S. housing boom, fiscal stimulus, and robust IPO\nactivity. It is often said that good companies often emerge from a crisis even\nstronger than they were at the beginning, and I think big U.S. banks fit this\nprofile.<sup>1<\/sup><\/p>\n\n\n\n<p>Below, I offer three reasons why I like banks in 2021, and how\nbanks fit into our strategies and approach at Zacks Investment Management. <\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_04_26&amp;content=stock_market_outlook_report \">Never Panic! Focus on Key Data and Fundamentals<\/a><\/strong><\/p>\n\n\n\n<p>For a little over a year, we\u2019ve experienced the force of a\nvolatile market due to the COVID-19 pandemic. As your investing concerns may\nfluctuate throughout this year, don\u2019t let the media and inflation concerns pressure\nyou into making immediate financial decisions. The key is research \u2013 instead of\npanicking in times like these, remember to not time the market! Now is the time\nto focus on fundamentals, hard data, and quality that can positively impact\nyour investments in the long term. <\/p>\n\n\n\n<p>To help you do this, I am offering all readers our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks April and May view on equity markets<\/em><\/li><li><em>A look at the Covid-19 vaccine tracker update<\/em><\/li><li><em>A look at U.S. returns expectations for\n2021&nbsp;<\/em><\/li><li><em>Zacks Rank S&amp;P 500 Sector Picks<\/em><\/li><li><em>What produces 2021 optimism?<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0<br> <strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_04_26&amp;content=stock_market_outlook_report \"><br>IT\u2019S FREE.\u00a0Download the Just-Released May 2021 Stock Market Outlook<\/a><sup>2<\/sup><\/strong><\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>The Yield Curve Favors Bank Profits <\/strong>&nbsp;<\/li><\/ul>\n\n\n\n<p>With yields on long-dated U.S. Treasuries ticking higher,\nthe yield curve has been steepening recently \u2013 and that\u2019s good news for banks. <\/p>\n\n\n\n<p>A steepening yield curve generally means a more profitable\nlending environment for banks. Since banks borrow money at short-term interest\nrates (still close to zero) and loan money out at longer-term interest rates\n(which are currently rising), a steeper yield curve means bigger net interest\nmargins on loan activity. As you can see in the chart below, the yield curve\nhas been steepening since this time last year, and I think will steepen even\nfurther as the year progresses. Again, this trend implies an improving profit\nlandscape for banks.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/8_pic1-1-1024x395.png\" alt=\"\" class=\"wp-image-9532\"\/><\/figure>\n\n\n\n<p><strong><em>Source: Federal Reserve Bank of St. Louis<sup>3<\/sup><\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Steady IPO, Merger, and Trading Activity<\/strong><\/li><\/ul>\n\n\n\n<p>Major banks can earn significant money from underwriting\ninitial public offerings (IPOs), facilitating mergers, and fulfilling trading\nactivity. I think all three will see continued strength in 2021. <\/p>\n\n\n\n<p>On the IPO front, for example, the number of publicly traded\ncompanies is on the rise after a 20+ year slump. From 1997 to 2017, the number\nof listed companies dropped from 8,500 to 4,500, spurred by the tech bubble\nbursting. Last year saw a bit of a reversal \u2013 after modest upticks in 2018 and\n2019, the number of listed companies surged by 200 in 2020, and I think we\u2019ll\nsee even bigger increases in 2021.<\/p>\n\n\n\n<p>As it relates to mergers and trading activity, I think the\nliquidity factor will play a big role. I have written many times before about\nthe extraordinary levels of monetary and fiscal stimulus, and the trillions of\ndollars sloshing around the capital markets. Banks should capitalize on this\nexcess liquidity, in my view, via more trading and more deals.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Higher Levels of Stock Buybacks<\/strong><\/li><\/ul>\n\n\n\n<p>Since stock\nprices are established by supply and demand forces \u2013 and since stock buybacks\nact as a supply reducer \u2013 buybacks can be a tailwind for a stock. In the\naftermath of the 2008 Global Financial Crisis, however, banks notably had\nrestrictions placed on the amount of stock they could repurchase \u2013 if they\ncould repurchase shares at all. <\/p>\n\n\n\n<p>Those\nrestrictions have eased over the years as banks recapitalized, and in the first\nquarter of 2021, regulators allowed banks to engage in stock buybacks. There\nare still leftover regulations on how much stock a bank can repurchase, but\nthose restrictions are due to be lifted at the end of June. I expect to see\nhigher levels of stock buybacks as a result.<\/p>\n\n\n\n<p>So, what does this all mean for investors?<\/p>\n\n\n\n<p>For one, I think having some diversified exposure to\nFinancials is a good idea for equity investors in 2021. At Zacks Investment\nManagement, we have a few strategies with different types of exposure to banks.\n<\/p>\n\n\n\n<p>Our Preferred Strategy has a significant weighting in the financials\u2019\nsector, as banks are a primary issuer of preferred shares. With yield\ncompression continuing in the banking sector as the yield curve steepens, we\nhold a positive outlook for many names in the Preferred space. Some 80% of our\nPreferred holdings are in some of the biggest and most robust U.S. banks (our\nweighting shifts over time). <\/p>\n\n\n\n<p>Financials exposure is also evident in the Zacks Dividend\nStrategy. The Dividend Strategy starts with an investable universe of the\nRussell 1000 Value Index, and many of the biggest names in banking are\ncategorized as value stocks. Our rigorous stock selection and screening process\nguide us to select what we see as the highest-quality banks relative to\nexpected 2021 earnings, which establishes our Financials exposure each year.<\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>Some of the U.S.\u2019s biggest banks have spent the last decade shoring\nup balance sheets and strengthening their capital position. In my view, a true\ntest was presented last spring with the global economic shutdown, and the\nbanking sector demonstrated its readiness. Capital and credit markets largely\noperated smoothly. <\/p>\n\n\n\n<p>Now, with the world emerging from the pandemic and the U.S.\neconomy poised for a strong growth year in 2021, I think banks are\nwell-positioned to deliver strong earnings results and perhaps strong stock\nmarket gains as a result. Not all bank stocks are created equal, however, so investors\nneed to use trusted and proven research and screening methods to establish\nbanking exposure in portfolios. Zacks Investment Management can help. <\/p>\n\n\n\n<p>The first step to long-term financial success\nis research. Instead of trying to time the market and emotionally invest, I\nrecommend focusing on key data points and economic indicators that could\npositively impact your investments in the future. Here at Zacks Investment\nManagement, we manage client portfolios based on investment goals, and\nwe drive our decision-making process based on research. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>The banking sector came through the economic shutdown in good shape\u2014and that bodes well for 2021<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71,1],"tags":[],"class_list":["post-9531","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group","category-uncategorized"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9531"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9531\/revisions"}],"predecessor-version":[{"id":10409,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9531\/revisions\/10409"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9531"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}