Financial Stocks Rally as Jefferies Turns Bullish Through 2021

(Bloomberg) -- U.S. banks and consumer financial stocks are poised for gains on the prospect of Covid-19 vaccines, more lending and a shift to value stocks.

That’s according to Jefferies Global Equity Strategist Sean Darby, who upgraded his view on the financials sector to “bullish” from “modestly bullish.”

“Improved visibility towards a successful coronavirus vaccine, easier lending conditions, little evidence of deflation and a sentiment switch from growth to value will lift U.S. bank shares through 2021,” Darby wrote in a note.

Financial stocks climbed in early Wednesday trading, with the KBW Bank Index adding as much as 1.8% to the highest since March 5. JPMorgan Chase & Co. rose as much as 2.2%; Bank of America Corp gained 1.4% and Citigroup rallied 3.8% to the highest since Sept. 4.

Darby called banks particularly sensitive to economic growth, and said they’ve set aside more than $110 billion for loan losses since the pandemic began, which means they have a “huge safety cushion” along with the potential for some of those reserves to be released.

Bank stocks also tend to bottom when revenue expectations run ahead of provisioning costs, with a tipping point that tends to coincide with accelerating economic data, easing deflation fears and negative real interest rates, he said. Darby felt that only the election and the absence of a vaccine were holding back the sector.

He highlighted banks that he likes: Citigroup Inc., Signature Bank and SVB Financial Group, among others. In consumer finance, those he mentioned included Ally Financial Inc., Capital One Financial Corp., Discover Financial Services, SLM Corp. and Synchrony Financial.

Still, Darby added a note of caution, warning that the “recent Covid-19 surge and absence of stimulus spending is likely to lead to some weaker economic data and potentially higher impairment charges,” with an “obvious risk” of a double-dip recession.

Bank stocks have been on a roll this month, with the KBW Bank Index surging some 18%, after being pummeled for most of this year by pandemic woes and low interest rates. They recently played catch-up on post-election and Covid-19 vaccine optimism, along with hopes for surging government spending, more lending and deal-making, along with a steeper yield curve. Some have worried those gains might not hold in the event of a “W”-shaped double dip economic decline and recovery.

Read more: Dreaded W-Shaped Recovery Could Undo Bank Stock Gains

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