Retracement in Bank Stocks Provides Buying Opportunity

A 2-basis-point rise in NIMs would improve earnings by 1.9% in 2022

While stocks rallied sharply after Pfizer Inc. (PFE) announced that its COVID-19 vaccine was 90% effective, banking names have outperformed the broader market by about 8% over the past week as the news pushed up bond yields amid hopes of a quicker economic recovery. Rising bond yields benefit banks because it increases the margin between what they pay depositors and receive from borrowers.

Key Takeaways

  • Bank stocks have outperformed the broader market over the past week because of rising bond yields.
  • Look for the bullish momentum to continue in Bank of America Corporation (BAC) shares given the breakout above a downtrend line occurring on above-average volume.
  • A golden cross on the U.S. Bancorp (USB) chart indicates the start of a new uptrend.

According to JPMorgan banking analyst Vivek Juneja, a rise of 2 basis points in net interest margins (NIMs) would improve bank earnings per share by 1.9% in 2022, per Barron's. However, traders should keep in mind that the Federal Reserve has pledged to keep interest rates low for the foreseeable future and that the sector faces the prospect of heightened regulation under a Biden administration. 

Those who follow banking stocks should keep a close eye on the two industry heavyweights outlined below that are pulling back toward major chart support. Let's take a more detailed look at each name and use technical analysis to identify high-probability entry points.

Bank of America Corporation (BAC)

The Charlotte, North Carolina-based financial giant reported a 16% slump in third quarter profit to $4.9 billion, or 51 cents per share, while revenues of $20.45 billion fell short of analysts' forecast of $20.8 billion. Despite the bank's net interest income (NII) falling by 17% in the period, CEO Brian Moynihan has said that the key figure will likely bottom in the third quarter. Last month, Juneja raised JPMorgan's price target on Bank of America to $27.50 from $26 and kept the firm's "Overweight" rating on the stock. Juneja argues that better-than-expected credit quality should offset weakness in net interest income. As of Nov. 13, 2020, Bank of America stock has a market capitalization of $230.9 billion and is trading 8.45% higher over the past week. Year to date, the shares have fallen 23%. Investors also bank a 2.63% dividend yield.

Since Monday's breakout gap above a downtrend line stretching back to the pre-COVID high and close above the 200-day simple moving average (SMA), the shares have retraced as traders book quick profits. However, look for the bullish momentum to continue given the move higher occurred on above-average volume. Those who want to buy the stock should look for entries around $25, where price action has flipped these same indicators from resistance into support.

Chart depicting the share price of BAC.

Volume is the amount of an asset or security that changes hands over some period of time, often over the course of a day.

U.S. Bancorp (USB)

The nation's seventh largest bank by assets disclosed a third quarter profit of $1.58 billion, or 99 cents per share, topping Wall Street expectations of 91 cents per share as the company's fee-based business helped offset lower NII and rising expenses related to the pandemic. Although NII of $3.23 billion declined slightly from the year-ago period, the metric came in ahead of analysts' forecast of $3.2 billion. Moreover, total deposits and loans grew by 15.9% and 6.4% year over year, respectively. Wall Street has a 12-month consensus price target on the company at $44.76, representing 4.6% upside potential to Thursday's $42.81 close. U.S. Bancorp stock offers an enticing 3.84% dividend yield and is trading up nearly 6% over the past week as of Nov. 13, 2020. Since the start of the year, the shares have declined 25.67%.

After reaching an eight-month high earlier this week, the share price has retreated slightly in recent trading sessions. Still, a move of the 50-day SMA back above the 200-day SMA Thursday – known by technical analysts as a golden cross – indicates the start of a new uptrend. Therefore, active traders should view further pullbacks as a buying opportunity. Look for an entry point at the $41 level, where price finds crucial support from a multi-month downtrend line.

Chart depicting the share price of U.S. Bancorp (USB)

During a pullback, price drops are relatively short in duration - for example, a few consecutive sessions – before the uptrend resumes.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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