Here's Why JPM, BAC, C, WFC and Other Bank Stocks are Soaring

The week begun with a sense of optimism as the coronavirus vaccine hope added to Joe Biden winning the U.S. Presidential election.

The vaccine being developed by Pfizer Inc. PFE and BioNTech SE has been found to be more than 90% effective in preventing coronavirus infections. This is the source of investors’ bullish stance. Thus, all three major indexes – the S&P 500, Dow Jones and Nasdaq – hit all-time highs. While both S&P 500 and Dow Jones ended yesterday in green, the tech-driven Nasdaq fell 1.5%.

The S&P 500 Financials sector was one of the top performers, rallying 8.2%. Further, SPDR S&P Regional Banking ETF and KBW Nasdaq Bank Index jumped 15.4% and 13.5%, respectively.

The Wall Street biggies – JPMorgan JPM surged 13.5%, Bank of America BAC 14.2%, Citigroup C 11.5% and Wells Fargo WFC were up 10.5%. In fact, all the bank stocks on the S&P 500 Index were up more than 5%. Moreover, several other smaller banks including Prosperity Bancshares PB, BancorpSouth Bank, Webster Financial Corporation WBS, Associated Banc-Corp and New York Community Bancorp rallied substantially.

Why Vaccine-Related Development is Propelling Bank Stocks

Bank stocks have been among the worst performing industry since the coronavirus outbreak in March. This is mainly due to the fact that banks’ financials are highly dependent on the health of the economy.

With the pandemic impeding business activities across the globe and resulting in economic slowdown, banks have been hit hard. This, coupled with low interest rates, (the Federal Reserve cut the rates to near-zero in mid-March to support the U.S. economy) has been weighing significantly on the bank stocks.  

Therefore, a positive development related to coronavirus vaccine is being seen as a hope for restoration of normal activities. Also, it indicates that there is a high chance that other vaccine developers could find favorable results soon. If these happen, economic recovery will likely speed up and the chances of banks facing high level of delinquent loans will lessen. This will also reduce loan-loss uncertainty, which had led banks to built billion of dollars of reserves.

Further, as the economy recovers, demand for loan (which had been faltering of late due to less appetite among businesses to grow) should rise. This will, in turn support banks’ net interest income (its primary source of revenues) and net interest margin despite low rate environment.

Additionally, several banks had voluntarily/involuntarily suspended share buybacks and even slashed dividends to conserve liquidity. Thus, with the economic recovery, banks’ capital development actions are expected to return to pre-crisis level. This will enhance shareholder value.

Though the vaccine-related development is good news, banks are not expected to be out of woods just yet. Distribution of the vaccine to those who immediately need it and to the larger population will take time.

But one should keep an eye on fundamentally strong bank stocks and make wise investment decisions till then to get profitable returns in the future.

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JPMorgan Chase Co. (JPM) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
Pfizer Inc. (PFE) : Free Stock Analysis Report
 
Wells Fargo Company (WFC) : Free Stock Analysis Report
 
Prosperity Bancshares, Inc. (PB) : Free Stock Analysis Report
 
Webster Financial Corporation (WBS) : Free Stock Analysis Report
 
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