Good News for Bank Stock Investors in 2021

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When the COVID-19 pandemic hit, bank stocks were one of the hardest-hit parts of the market. However, recent comments by Treasury Secretary Janet Yellen indicate that the industry wasn’t nearly as affected by the pandemic as many had feared. In this Fool Live video clip, recorded on March 29, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the news and what it could mean for bank investors. 

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Jason Moser: This is obviously very relevant to the greater world of financials. Treasury Secretary Janet Yellen, says that banks have improved their capital positions and should be allowed to continue to buy back their own shares, as well as paying and growing those dividends. I mean, this is welcome news from someone who clearly plays an important role in what these banks are able to do and what they are able to not do. To me, this was a matter of when not really if, but to see the statement is encouraging particularly given the way 2020 really through a curveball at it pretty much everyone.

Matt Frankel: Banks were some of the hardest-hit stocks when the pandemic started.

Moser: Yeah.

Frankel: And for good reason, people thought that people wouldn’t be able to pay their loans, which, for a business that loans money that’s pretty devastating. Not just that, but interest rates collapsed to almost nothing. Not only are banks at risk of not getting paid back for their loans. But the interest they are collecting on the loans that they are being paid on is a lot lower than it used to be. They got a one-two punch there. But as we go on, it really looks like banks aren’t being affected as harshly as we thought they might be. One, there were government programs to pretty much suspend loan payments. The mortgage forbearance that was included in the CARES Act, for example, really helped people keep their heads above water financially. I know my aunt was having trouble when she lost her job because of COVID — she was having trouble paying some bills. They didn’t give her any hard time. She asked if you can postponed or auto loan for a few months and they just did it. Banks have been really great about working with customers, even where they didn’t legally have to. Three rounds of stimulus money. That’s unprecedented. The unemployment insurance boost, that was also unprecedented. People were generally able to pay their bills. Default rates weren’t quite as low as they were pre-pandemic, but not nearly as bad as we thought. Now interest rates are starting to tick up, which is pretty terrible for every technology stock in the market as we’ve seen. But for banks, that’s actually pretty welcome news because we’re getting interest rates back to a somewhat normal level. When banks loan money and customers pay it back, they are actually making some money as well.