Analysts are positive on the potential for bank stocks in 2021, with the staff at Goldman Sachs Equity Research, BofA Global Research and Piper Sandler & Co. expecting economic recovery in the U.S. to drive strong returns for banks.

"Historically, 75% of bank stock outperformance to the S&P occurs in Year 1 of a recovery," the BofA Global Research analysts wrote. They said this recovery is different from the one following the 2008 financial crisis, given banks' high levels of capital and liquidity, lower interest rates and the current expected credit loss model all driving a faster recovery.

Small-cap banks

Analysts at Piper Sandler & Co. named several community banks as 2021 top ideas: Santa Ana, Calif.-based Banc of California Inc., Wilmington, Del.-based The Bancorp Inc., Pikeville, Ky.-based Community Trust Bancorp Inc., Jericho, N.Y.-based Esquire Financial Holdings Inc., Uniondale, N.Y.-based Flushing Financial Corp., Lewiston, Maine-based Northeast Bank, Aurora, Ill.-based Old Second Bancorp Inc. and Greenville, S.C.-based Southern First Bancshares Inc.

The Bancorp's "attractive niche" of providing banking services to technology companies puts it in a strong position, according to the analysts.

Community Trust Bancorp could pursue its strategy of being a serial acquirer again after the Federal Reserve lifted its consent order against the bank in December 2020, the analysts wrote.

Flushing Financial could be an attractive deal target in the new year, according to Piper Sandler. The company has a low valuation, "an attractive mix of commercially oriented loans and deposits, a unique Asian banking niche" and a management team and board in their 70s, the analysts wrote. "We can't help but think that many other banks would be interested in acquiring the company," they added.

Old Second Bancorp stands to benefit from ongoing disruption as a result of several deals in the Chicago area, according to the analysts.

Mid-cap banks

Analysts at Goldman Sachs chose Providence, R.I.-based Citizens Financial Group Inc., Memphis, Tenn.-based First Horizon Corp., Cleveland-based KeyCorp, New York City-based Signature Bank, Detroit-based Ally Financial Inc., Stamford, Conn.-based Synchrony Financial, Riverwoods, Ill.-based Discover Financial Services, Birmingham, Ala.-based Regions Financial Corp. and Cincinnati-based Fifth Third Bancorp.

The analysts wrote that they believe Regions' margins have less downside than peers and that the bank has been more conservative with reserve building, and therefore may be able to release more. The analysts anticipate the bank will be able to hold costs steady.

The Goldman Sachs analysts upgraded Fifth Third to "buy" from "neutral," highlighting the bank's "best in class" cost leveraging, higher-than-peer reserving, leading to greater releases, strong capital ratios and returns of 13%.

Analysts at BofA Global Research also chose Fifth Third among their top picks for mid-cap banks. The company has a "compelling" valuation and is "nicely levered to a recovery in business spend and expansion," the analysts wrote, anticipating economic recovery to start in the second half of 2021. Fifth Third has the opportunity to remix assets to drive higher net interest margin and income, due to a high amount of cash on its balance sheet, the analysts wrote.

The BofA analysts also chose Pasadena, Calif.-based East West Bancorp Inc., writing that the bank has "one of the most compelling risk/reward [ratios] in the group," and that the fading trade dispute with China will help the bank's stock. "We believe a more predictable policy framework will be enough for investors to gain comfort in owning the name," they wrote.

The analysts also chose First Horizon and Signature Bank among their top picks, referring to 2021 as a "breakout year" for First Horizon's stock, and noting Signature's "remarkable comeback" after falling from the outlook for New York City commercial real estate.

Analysts at Piper Sandler & Co. chose American Express Co., due to expected recovery in travel and entertainment spending among consumers, with dining opening first, following by lodging and finally domestic airline tickets. "Concerns about corporate travel are disproportionate to earnings per share impact," the analysts wrote. The company has also had "excellent" credit quality and is expected to resume share repurchases in 2021.

The analysts also chose Columbus, Ohio-based Huntington Bancshares Inc. due to the "earnings momentum" and "company-specific opportunities" stemming from its announced deal with TCF Financial Corp. In addition, the bank is located in swiftly recovering markets, has a firm stand-alone net interest margin and manageable loss content, according to the analysts. "The valuation strikes us as too attractive to ignore, given the likely earnings trajectory combined with recent underperformance," the Piper Sandler analysts wrote.

Among Piper Sandler's other choices were Columbus, Ga.-based Synovus Financial Corp., Little Rock, Ark.-based Bank OZK and Dubuque, Iowa-based Heartland Financial USA Inc.

Large-cap banks

Analysts at BofA Global Research and Piper Sandler & Co. chose New York-based Citigroup Inc. as a top pick or top idea for 2021. Citigroup "stands out" after underperforming in 2020, partly due to the market overreacting to news of an incoming regulatory consent order in mid-September, the Piper Sandler & Co. analysts wrote. A changing of the guard when Jane Fraser becomes CEO in February implies an even more meaningful transformation to come for the company, the BofA Global Research analysts wrote.

The BofA Global Research analysts also named New York-based JPMorgan Chase & Co. a top pick for 2021. "We believe [JPMorgan] is uniquely better-positioned to benefit from these themes versus big banks we cover: a stimulus-aided comeback of the U.S. consumer, the potential return of travel and restaurant spend, and the steepening of the curve," Erika Najarian wrote in her Jan. 7 report upgrading the company's stock rating.

Goldman Sachs analysts pegged Charlotte, N.C.-based Truist Financial Corp. and McLean, Va.-based Capital One Financial Corp. as top picks for the year.