Pfizer and Moderna’s encouraging COVID-19 vaccine update makes bank stocks look attractive

The Case For Buying Bank Stocks Is Based On Encouraging Vaccine Updates

Pfizer announced in early November its COVID-19 vaccine was more than 90% effective in preventing an illness. Just weeks later, Moderna followed up with an even better 94% effective rate. These two announcements helped contribute to a surge in stock prices worldwide, especially bank stocks.

Big Banks Making Moves

Prior to the COVID-19 pandemic, bank and brokerage firms worldwide were making major moves to position their businesses to be more durable over the long-term. In Canada, the RBC Direct platform began offering free real-time streaming quotes on U.S. and Canadian exchanges with no minimum balance required.

South of the Canadian border, a mega M&A deal in late 2019 saw Charles Schwab acquire TD Ameritrade for $26 billion. The combined entity would prove to be an industry titan backed by $1.3 trillion in assets, $17 billion in annualized revenue, and pretax profits at $8 billion.

A few months later, Morgan Stanley followed up with a mega deal of its own. The Wall Street banking giant reached a deal to acquire E*Trade for $13 billion.

Deals that didn’t primarily focus on a stock trading platform include BB&T Corp merging with SunTrust Banks to create one of the sixth-largest banks as measured by total assets.

North American banks aren’t the only ones making major moves to bolster their business for the long-term. Some of Europe’s biggest banks were looking at M&A deals to improve their strategic positioning against the Eurozone and around the world.

2019 Recap: Performance Varied By Region

U.S. Bank investors exited 2019 on a positive note and performed more favourably to some global rivals. The KBW Nasdaq Bank Index ended the year with an approximate 30% return versus the benchmark S&P 500 index that was up around 28% for the year. The strong economic performance in the U.S., led by record-low unemployment levels and historic highs in consumer confidence, experts were optimistic for more of the same in 2020.

While investors with exposure to U.S. banks saw a return roughly inline to slightly better than the benchmark, Canadian banks fell short of expectations. Throughout 2019, Canadian bank stocks gained 14% which was nine percentage points below the S&P/TSX Composite Index’s 23% return. This marks the first time since 2019 that bank stocks underperformed the benchmark, leaving analysts less confident in the group’s outlook in 2020.

Across the Atlantic, European bank investors went through a difficult 2019, most notably in the second quarter. A sharp 13% sell-off in European bank stocks added to already existing losses. By the end of the year, several European banks were included in the list of worst performers within the benchmark Stoxx Europe 600 Index, including Swedbank AB (down 29%) and Spain’s Bankia SA (down 26%).

COVID-19 Vaccine A Catalyst For Bank Stocks

Bank stocks were among the most impacted by the global pandemic, as one would expect. The global economy was shrinking as a result of COVID-19 stay at home orders while companies ​were forced to re-think or even cancel prior expansion plans

Investors flocked towards tech stocks with exposure to stay-at-home and work-from-home themes. This transition rewarded investors through the first three quarters of the year. But expectations for one or more vaccines to be distributed to the population in some form may have changed the narrative.

Expectations for some form of a return to normalcy, even if this doesn’t take place until late 2021, would benefit bank stocks. Global investors across the U.S., Canada, Europe, and elsewhere agreed in near unison as bank stocks soared in unison following Pfizer’s encouraging vaccine update.

A Few Stock Picks From

Investors with access to invest in global stocks have plenty of bank stocks to choose from. Among the major Canadian banks, all offer investors an attractive dividend yield of at least 4%. Scotia Bank holds the title as giving back the most cash to investors in terms of dividend yield at nearly 6%. Investors that lock in a solid dividend yield months before a vaccine rollout should be very happy with this decision in a few years time.

But, Royal Bank is the largest of Canada’s banks by many metrics. The company impressively grew revenue during its second quarter on a year-over-year basis despite the pandemic. RBC’s stock is among the most expensive based on its PE ratio but this is the price investors may have to pay for owning a banking giant that can show growth during difficult times

Moving on to U.S. listed companies, one of the overlooked stock ideas is American Express — technically a bank. American Express is best known for its credit card and the stock soared after the Pfizer vaccine announcement. Investors are now expecting business travel and spending will pick up at a dramatic pace in 2021 and beyond, hopefully at a speed that is faster than what analysts and experts are expecting.

Finally, European banks traded at their lowest level on record in May but the sentiment improved immediately following the vaccine announcement. Despite a one-day surge, European stocks are still trading at a notable discount versus pre-pandemic levels.

Barclays, as an example, has doubled in value since its pandemic lows but still has a lot of catching up to do to reclaim its 52-week high (NYSE listed stock) of $10.22. Backed by a valuation that represents a 60% discount to its tangible net asset value and expectations for a 4.1% dividend yield in 2021, the banking giant is a good stock to invest in.

Bottom Line: Buy Any Solid Bank

Experts for the most part agree that Pfizer and Moderna’s vaccine announcement will be followed up with similar developments from the likes of Johnson & Johnson, AstraZeneca, and others.

If two vaccine announcements can help lift investor sentiment in bank stocks, imagine what four or five additional vaccine releases can do? Now might be the time to buy any bank that is well capitalized with a strong balance sheet and offers investors a decent yield.

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