Despite the strong performance of regional bank stocks, which have increased 28% YTD as well as 103% over the past year, we eiterate our bullish sector stance. We believe that as momentum in the economy continues to build and the Fed makes progress on its andate to achieve full employment, this will create a sustained tailwind lifting not only inflation (at least over the short run) but interest rates as well (again, at least over the short run). Moreover, with stocks in our group trading at only 1.3x TBV even after the strong utperformance, this is still well below the prepandemic level (of 1.9x in 2019) as well as longer-term average (in the 2x range). While we’re not expecting to hear anything particularly exciting in 1Q21 earnings calls, the key in our view is to be long the sector today, which is (1) before NIMs start to expand, (2) before a mountain of reserves start to get released, (3) before loan growth improves, and (4) before capital return accelerates. In fact, once this checklist of “befores” become “afters”, it’s likely that regional bank stocks will be trading at 2x+ P/TBV which implies an additional 40%+ upside at the low-end from current levels. On rates, even though the 10-year has increased 79 bps YTD, the 2/10 spread is only in line with the historical average with this level and likely to move to prior peaks (in the 200+ bps range), particularly with another $2T of stimulus now passed. As for credit quality, while there will be one-off credit challenges for banks to work through, with vaccines rolling out and an additional stimulus passed, we see this as the credit cycle with empty calories (meaning no widespread credit risk). As a result, as economic forecasts are now improving, banks will accelerate the pace of releasing reserves. Loan demand in the back half of the year should gradually pick up along with economic growth, and NIMs may have reached an inflection point, with higher longterm rates gradually flowing into earning asset yields. Moreover, rather than investors needing to view regional banks as a way to make a quick buck and run, we now see many names as buy and “hodls” (a term used by crypto investors to convey long-term holds) for the long term, including FRC, SIVB, SBNY, PNFP, and HBAN.
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