The financial sector was hit hard last year. In addition to witnessing higher default rates due to the economic effects of the coronavirus pandemic, their financials were negatively impacted by the low-interest-rate environment and the central bank’s asset purchases. As the financial sector’s health is causally related to the health of the economy, it suffered in particularly in the first two quarters of 2020…
The sector garnered huge momentum in the third quarter, with the economy registering an annual growth rate of 33.4% (off an exceptionally low base). Positive developments on the vaccine front helped improve economic sentiment. The widely held expectation is that an effective mass vaccination drive will catalyze an economic revival this year. Also, the Federal Reserve’s recent round of stress testing found U.S. banks to be sufficiently healthy to withstand adverse financial conditions caused by the pandemic.
The pandemic turned out to be less of a headwind than expected for some financial stocks. And a few companies within the consumer financial services and investment banking services industries have recovered significantly from their March lows. The sector underperformed the overall broader market in 2020, as evidenced by the Financial Select Sector SPDR ETF’s (XLF) 4.3% loss versus the S&P 500’s 15.4% returns in 2020. However, XLF’s 22% return over the past three months reflects solid short-term bullishness.
Increasing optimism among investors about the industry’s recovery this year and a rising long-term treasury yield outlook have been helping the industry regain significant investor attention. Further, Fed officials project the U.S. economy to grow at a rate of 4.2% in 2021.
Easier lending conditions, moderate inflation, a steepening yield curve, and a strong investor rotation into value stocks should continue boosting financial stocks throughout 2021. Based on this, we think JPMorgan Chase & Co. (JPM – Get Rating), Visa Inc. (V – Get Rating), Morgan Stanley (MS – Get Rating) and The Goldman Sachs Group, Inc. (GS – Get Rating) are the four best sector picks to play the recovery.
JPMorgan Chase & Co. (JPM – Get Rating)
JPM is a leading global financial services firm with assets of $3.2 trillion and operations in more than 60 countries worldwide. The firm is a leader in investment banking, commercial banking, and asset management. It operates in four segments – Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).
JPM excelled in the second round of stress tests conducted by the Fed last month. The firm’s Basel III Standardized approach minimum Common Equity Tier 1 (CET1) capital ratio remained at 11.3%, inclusive of the Stress Capital Buffer (SCB) requirement of 3.3%. Consequently, the company’s board has approved a new common equity share repurchase program of $30 billion.
JPM will host a conference call on January 15 to discuss its financial results for the fourth quarter and full year 2020 ended December 31, 2020. In the third quarter, ended September 30, 2020, JPM posted revenue of $29.9 billion, which was relatively flat to the year-ago quarter. The company set aside $611 million as provision for credit losses and to maintain its credit reserves at $34 billion. While average its loans were up 1%, average deposits surged 30% year-over-year. Its EPS for the quarter came in $2.92, rising 112% sequentially.
JPM is benefiting greatly from its strong capital, massive reserves, and..
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