Citi, BofA Jump as Mayo Asks ‘What’s Not to Like’ at Big Banks?

(Bloomberg) -- Big bank stocks regained their footing on Monday, with a fresh crop of analysts expressing bullish views on the industry's prospects amid rebounding economic growth.

The KBW Bank Index rose as much as 3.2% after shedding more than 5% in a two-day selloff as optimism about widespread vaccination, more government spending and a strengthening economy had turned into fear that rising bond yields and inflation would take a toll on companies and consumers.

That concern eased on Monday as yields stabilized, allowing investors to turn their attention once again to the benefits of more stimulus and the potential end of lockdowns. Morgan Stanley raised big bank price targets and lifted estimates, with analyst Betsy Graseck noting that the economy appeared poised to break out due to Covid-19 vaccine distribution and new stimulus.

She cited expectations for 10-year Treasury yields at 1.70% by year end, the resumption of buybacks and better credit, while flagging State Street Corp., Synchrony Financial, and Citigroup Inc. as top picks. State Street rose as much as 4.8% in Monday trading, heading toward its biggest advance since Jan. 6. Synchrony added 3.8% and Citigroup climbed as much as 5%. Jefferies strategists also highlighted potential share repurchases in recommending banks and energy stocks.

Plus, bank stocks are the cheapest group in the S&P 500, while they're set for rising earnings, according to Wells Fargo analyst Mike Mayo.

“What's not to like?” Mayo said in a phone interview, reiterating the three recent turning points he's seen for banks: The efficacy of Pfizer's Covid-19 vaccine in November; the Federal Reserve allowing for more buybacks in December, and January's Georgia Senate elections, which paved the way for more government stimulus.

Read more: Feb. 22, Mike Mayo Lifts BofA Target on Reflation Trade, Recovery Boost

Banks' price-to-book ratios were at an all-time low until the Pfizer vaccine results, he noted, and are still in the bottom quartile among S&P 500 companies, he said.

“Valuation for the big six banks has returned to pre-pandemic levels in terms of price-tangible book value,” Bloomberg Intelligence analyst Alison Williams said. She cited robust capital markets as helping the banks' near-term return-on-equity prospects, while rising interest rates and better loan demand may be key in the second half of this year.

JPMorgan Chase & Co. added as much as 2.2% on Monday, while Bank of America Corp. gained as much as 3.1% and Goldman Sachs Group Inc. climbed as much as 3.2%.

Last week, Credit Suisse‘s Susan Roth Katzke wrote about the optimism of bank executives who spoke at the firm's financial services conference, while noting flagged tepid lending as the post-pandemic recovery had yet to unfold.

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