Bank Stocks Rise On Buyback Optimism

Bank stocks traded higher on a brutal morning on Wall Street on Monday after the Federal Reserve said banks can resume their share buybacks in the first quarter of 2021.

What Happened? After Friday's close, the Fed published the results of its annual Comprehensive Capital Analysis and Review (CCAR) and said banks can resume buybacks in the first quarter, a decision that took the market by surprise.

Why It’s Important: Not only is the Fed decision a vote of confidence in the U.S. economic recovery, it's also a major stamp of approval on the health of the credit markets and the balance sheets of the big banks.

See Also: Fed Decision Could Bring Bank Stocks Into Bull Market

Almost immediately after the announcement, JPMorgan Chase & Co. JPM announced it authorized a new $30 billion buyback program.

On Monday, Bank of America analyst Erika Najarian said she expects other banks to follow JPMorgan’s lead and take full advantage of the opportunity to return some of their excess capital to shareholders.

“While we expect the Fed to remain nimble (i.e., apply extra restrictions) should the economic outlook worsen ahead of 2Q21, we nonetheless think there is a strong probability that robust buybacks will return in 2Q21,” Najarian wrote in a note.

She said the combination of cheap bank stock valuations and the potential for aggressive buybacks starting as soon as next quarter is a winning combination for investors.

Najarian estimates PNC Financial Services Group Inc PNC, Bank of New York Mellon Corp BK, State Street Corp STT, Goldman Sachs Group Inc GS and Morgan Stanley MS are among the bank stocks that have the capacity to buy back more than 1.6% of their current market cap in the first quarter.

Benzinga’s Take: Banks will continue to deal with 0% interest rates weighing on net interest margins in 2021 and beyond. However, bank balance sheets will be far more healthy in 2021 than they were back in 2010 during the recovery from the last economic crisis.