Bank stocks have been recovering fast lately from the pandemic-related slump. SPDR S&P Bank ETF (KBE Quick QuoteKBE - Free Report) , which lost 3% past year, added 37.1% in the past three months on COVID-19 vaccine news. Notably, Pfizer (PFE Quick QuotePFE - Free Report) , Moderna (MRNA Quick QuoteMRNA - Free Report) and AstraZeneca (AZN Quick QuoteAZN - Free Report) have come up with back-to-back upbeat vaccine updates since November.

This instigated sooner-than-expected return to economic normalcy and boosted risk-on sentiments, which in turn resulted in a steepening yield curve. Since banks’ net interest margin benefit from a rising rate environment, their stocks have soared lately.

Against this backdrop, below we highlight a few more reasons why banks could be great picks in 2021.

Cheaper Valuation

Banking stocks were beaten down in the peak of the pandemic as fears of higher defaults at the household and corporate levels hit the space hard due to economic slowdown. So, banking stocks are offering value now and have found room for growth (read: ETFs to Play as Vaccine News Looks to Outdo Virus Fear). 

Fed’s Signal for Buybacks

The Federal Reserve okayed the resumption of stock buybacks from January, with as much as $11 billion going toward shareholders. This clearly signals banks’ healthy financial position. Results from the central bank’s special coronavirus stress tests showed “a pass for all of the tested banks and a welcomed green light for capital returns,” Susan Roth Katzke, an analyst at Credit Suisse Group AG, wrote in a note to clients, as quoted on Bloomberg.

It means that the banks have enough capital to counter another wave of virus spread, if there is any. Notably, in June, the Fed put provisional caps on buying back own stocks or increasing dividend payments by the big banks. Soon after the announcement, J.P. Morgan (JPM) announced its $30 billion buyback decision.

Democrats’ Control Over Senate 

Analysts believe that a Democratic majority in the Senate would cause an easy passage of President-elect Joe Biden’s agendas as indicated on Street.com. Democrats are apparently in favor of more fiscal stimulus amid the pandemic. We may see $2,000-stimulus checks reaching to Americans. “Things like extended unemployment benefits, postponed (or even forgiven) student loan payments, and small business aid” will likely face less hindrance in getting passed. More stimulus means more economic activity, loan growth and a rising rate environment — all of which a great for banks.

Solid Spike in Bond Yields

Vaccine rollout will result in U.S. normalization this year. This in turn promotes risk-on sentiments and economic growth, helping long-term treasury yields to soar. As of Jan 8, 2021, benchmark treasury yields were 1.13% versus 0.93% at the start of the month and as low as 0.55% recorded in mid-2020. In the coming days, we expect a faster rise in bond yields. With the Fed remaining dovish, such a spike in long-term rates should result in a steepening yield curve. And bank stocks should return to good health.

ETFs in Focus

Against this backdrop, one can bet on bank ETFs like SPDR S&P Bank ETF (KBE Quick QuoteKBE - Free Report) , Invesco KBW Bank ETF (KBWB Quick QuoteKBWB - Free Report) , iShares U.S. Regional Banks ETF (IAT Quick QuoteIAT - Free Report) , First Trust NASDAQ ABA Community Bank Index (QABA) and First Trust Nasdaq Bank ETF (FTXO Quick QuoteFTXO - Free Report) . All these bank stocks have a P/E ratios of 12.93X, 12.42X, 11.47X, 14.09X and 14.76X, respectively, way lower than SPDR S&P 500 ETF (SPY)’s P/E of 23.79X. Such undervaluation will help in driving the funds even higher.  

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