Banks stocks have largely recovered from the shocks delivered by the coronavirus pandemic — and expectations are that the sector can make up more ground in coming months.
The KBW Nasdaq Bank Index, as of Jan. 11, is off just 4.5% from where it was in the beginning of 2020, largely a result of a 31% increase since the Nov. 3 election.
Improved stock prices should, over time, give bankers greater flexibility in making strategic decisions, industry observers said. It could allow more banks to raise offensive capital at good prices.
Banks that have the strongest recovery with their stock prices could have more financial leverage when it comes to acquisitions. Stock prices also factor into executive compensation and how much pressure management teams might face at upcoming annual meetings.
“Currency will be king in what I think will be a new world of active consolidation," said Robert Bolton, president of Iron Bay Capital. “I don’t think any management team can be blamed for the pandemic, but those that come out of this healthy and with strong share prices are going to have a lot more options.”
Several factors haven given investors more confidence about banks, industry experts said.
While Democrats have historically taken tough positions on regulation, investors view the party’s upcoming control of the White House and the Senate as a chance for the federal government to take a more aggressive stance against the pandemic, especially when it comes to vaccinations.
Investors also believe Democratic control could fast-track another round of stimulus, or at least more direct assistance to Americans. Those factors could hasten an economic recovery and motivate the Federal Reserve eventually to raise interest rates.
“Markets are starting to believe we will soon see stabilization both in terms of the virus and the economy,” Bolton said.
While impending change in Washington provided a lift late last year, capital management strategies will likely contribute more to a rise in bank stocks in coming months.
Banks have plenty of capital and seem more eager to do things such as repurchase stock and increase dividends that convey optimism. Bankers and investors widely expect increased M&A activity when the pandemic fades and buyers can more confidently assess sellers’ credit quality.
The Fed in December gave the biggest U.S. banks permission to initiate buybacks and increase dividends, as long as they are profitable, after determining that they were well-positioned to weather a second shock from the pandemic. Many community banks had also been holding back on capital deployment plans.
Buybacks make sense because banks can immediately stop repurchasing stock if something goes sideways. Buybacks also increase earnings per share by reducing the amount of outstanding stock, while signaling management’s confidence in areas such as capital adequacy and
The $15 billion-asset Banner Corp. in Walla Walla, Wash., authorized a 5% repurchase program in late December, with President and CEO Mark Grescovich calling the move an “effective capital management tool for building long-term shareholder value.”
Outsiders saw the announcement as “a testament to management's confidence in its overall asset quality,” said David Feaster, an analyst at Raymond James.
A few banks, including ServisFirst Bancshares in Birmingham, Ala., and Bank of Commerce Holdings in Sacramento, Calif., have increased their dividends in recent weeks. Industry experts said they expect more banks to boost their dividends as they get more comfortable with credit quality and profit trends.
“With clarity on the economy and credit, banks will get the added assurances they need for dividend increases,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods.
“Nobody wants to raise the dividend one quarter only to turn around and cut it the next, so a pretty strong level of certainty is needed,” DelMonte said. “But with vaccines, I think we are seeing the start of a new era.”
Dividend hikes such as Bank of Commerce’s are likely to be small at first, and relatively few in number, Feaster said. But he added that recent increases signify confidence and could mark the start of a trend.
Acquisitions, which can help banks cut costs and boost earnings over time, will likely gain steam heading into the second half of 2021, industry observers said.
“M&A will take time to build, but there is pent-up appetite and vaccines look like they could open the door” to more deals, said Stephen Scouten, an analyst at Piper Sandler.
While vaccines have created some optimism, uncertainty still lurks. It is unclear how long it will take to inoculate enough Americans to end the pandemic. And there is no guarantee that more stimulus is coming.
Still, bankers, much like bank investors, are becoming less apprehensive about the future.
Bolton, who spoke with about 20 management teams last month, said “they were all of the mind that things were looking OK and they were all generally confident” about this year.
Community bankers’ assessment of operating conditions, while still below pre-pandemic levels, improved at the end of 2020, according to a survey of 284 institutions conducted by the Conference of State Bank Supervisors in December.
While the fourth-quarter sentiment index, which stood at 98, remains below the 100 threshold that would indicate positive sentiment, it improved slightly from a quarter earlier. And the index for bankers’ outlook for future business conditions registered a healthy 120, a 16.5% improvement from the third quarter.
“It will take time to work through this even as the economy comes back,” said Michael Stevens, a senior executive vice president at the state bank supervisor group. “But banks will come back from a position of strength, particularly as it relates to capital.”
