3 Top Bank Stock Picks For 'Goldilocks Inflation' Cycle

Investors are gearing up for a potential jump in inflation rates following an unprecedented $6 trillion in U.S. government stimulus spending since the beginning of 2020.

An extended period of elevated inflation may be great news for banks as long as inflation rates don’t get out of control, according to Bank of America analyst Erika Najarian

In a new research note, Najarian said the Bank of America economics team is forecasting 7% U.S. GDP growth in 2021 and a 2.15% yield on 10-year U.S. Treasury bonds this year. As a result, she sees what she calls a “Goldilocks” inflation outlook that could fuel an extended rally in bank stocks.

“In previous instances of ‘Goldilocks’ inflation, or modest inflation >2% during periods of economic strength and favorable yield curve, banks have tended to outperform the broader market – in this instance, four out of the six periods observed since 1990,” Najarian said.

For example, bank stocks outperformed in the inflationary period in 2011 following the global financial crisis.

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How To Play It: Najarian said Citigroup Inc C is her top large-cap bank stock pick. She said new CEO Jane Fraser can provide a unique catalyst for the stock, and its 1.0 price-to-tangible-book-value suggests plenty of valuation upside.

In addition to Citigroup, Najarian likes PNC Financial Services Group Inc PNC because of its exposure to a rebound in capex and M&T Bank Corporation MTB as a New York City rebound play.

Benzinga’s Take: Bank stocks have been red-hot so far in 2020, but inflation and rising interest rates could lay the groundwork for record bank earnings in coming years. The only thing bank stock investors need to monitor is the potential for hyperinflation given the rapidly rising interest rates of the 1970s were actually bad for bank stocks.