Big bank stocks could rise by another 21% in a 'renaissance' for the sector supported by economic recovery, says Bank of America

• Bank of America has increased its price objectives on banks and sees stocks of large-cap, buy-rated banks rising another 21%.
• Banks will benefit from the US economic recovery that's likely been 'turbocharged' by the $1.9 trillion stimulus package.
• BofA raised its price targets on JPMorgan Chase and Wells Fargo.

Large-cap bank stocks have the headroom to rise 21% as buy-rated lenders benefit from repairing in the US economy from the COVID-19 health crisis and an accompanying increase in borrowing rates, says Bank of America.

In a note published Tuesday, BofA increased its price objectives on banks by 11%, outlining a 21% implied upside for larger companies and a 20% upside for small and mid-cap banks.

It pointed out that the KBW Nasdaq Bank Index has gained more than 50% since early November when Pfizer announced the creation of a coronavirus vaccine and is up about 20% so far in 2021. "[But] we think the sector has room to run," said BofA.

Among the calls, the target on JPMorgan Chase shares was pushed up to $181 from $163, with a potential gain of 20% from Monday's close at just below $151.

The "economic recovery is fast gaining steam, and will be likely turbocharged by the recently passed $1.9 trillion stimulus plan," said BofA analysts led by Erika Najarian in a note about the higher price objectives. Also, BofA's rates strategists have upwardly revised their year-end forecast on the 10-year Treasury yield to 2.15% from 1.75%.

The US government has been sending $1,400 checks to most Americans as part of the stimulus package. Bank of America foresees 2021 economic growth of 6.5% with an upward bias. Meanwhile, investors pricing in the potential for hotter inflation stoked by economic growth have propelled the 10-year yield to 14-month highs, past 1.7%. The 10-year yield and other long-dated Treasury yields are tied to mortgages, auto loans and other lending programs and banks can earn more from loans as those rates increase.

Wells Fargo's price objective was lifted to $43 from $39, indicating a 10% increase from Monday's settlement Citigroup's target was unchanged at $100 but still implies a 39% gain.

BofA said banks during recent conversations ahead of their quiet period before earnings, "suggest a continued upward bias to consensus estimates," even though there are expectations for "softer net interest income trends" in the first quarter. That view stems from stronger liquidity levels "as solid deposit growth continues to outpace loan growth near-term."

"It's early in the bank renaissance," said BofA. "Perhaps the most important takeaway to emerge from the economic shock of the pandemic is that it finally proved that banks had transformed themselves from the Global Financial Crisis, with all banks under coverage remaining profitable for full-year 2020, even with an accelerated increase in loan loss reserves," the analysts said. "This should effectively lower the cost of equity the markets assign to banks in recovery."