Bank stocks were well positioned to rebound in 2021 after a tough year during the pandemic, and that's exactly what they did. The KBW Nasdaq Bank Index, a measure of 24 of the largest banks based in the U.S., climbed nearly 28% during the first six months of the year. The majority of the top 12 largest bank stocks managed to appreciate more than the S&P 500's 16% gain through the first half of 2021, with some beating it significantly. Here are the three top-performing large bank stocks this year.
JPM Total Return Price data by YCharts
1. Capital One
Shares of the credit card company Capital One Financial (COF 1.89%) grew more than 57% in the first six months of 2021. They are also up significantly from what shares traded at prior to the pandemic and have hit new highs. After posting losses in the first two quarters of 2020 and trimming its dividend by 75% in July of last year, Capital One has posted three straight quarters in the black and fully restored its dividend. In the first quarter of 2021, Capital One released $1.6 billion of reserves previously stowed away for potential loan losses and reported over $3.2 billion in profits.
While shares have run up considerably, I still think the company is very well positioned considering the consumer could lead, or at least play a major role in the economic recovery. Additionally, Capital One appears to have an excess of reserves for loan losses still built up, meaning more reserve releases could be coming. The bank also passed the Federal Reserve's annual stress testing this year with flying colors, allowing it to significantly reduce its regulatory capital requirements. As a result, Capital One now has significant excess capital.
Image source: Getty Images.
2. Wells Fargo
After getting beaten down during the pandemic, shares of Wells Fargo (WFC 0.05%) have surged this year. During the first six months of the year, Wells Fargo stock appreciated close to 51%. The bank struggled mightily last year, reporting very little in profits and cutting its dividend 80%. The bank has now struggled for years due to the $1.95 trillion asset cap the Federal Reserve placed on it for its phony-accounts scandal, which essentially prevents Wells Fargo from growing the balance sheet like it wants to. The ultra-low interest rate environment in 2020 also severely cut into the bank's lending profits.
But in February, Wells Fargo took a major step toward getting that asset cap removed when media outlets reported that the Fed approved the bank's risk-management and governance overhaul plan. Wells Fargo has also benefited from moves by management that have seen the bank sell off non-core business lines and initiate plans to find revenue synergies and expense efficiencies. Recently, Wells Fargo doubled its quarterly dividend and its board authorized an $18 billion share repurchase plan. Recently trading at nearly 130% to tangible book value (equity minus goodwill and intangible assets), I do really like Wells Fargo at these levels.
3. Charles Schwab
Like Capital One, Charles Schwab (SCHW 0.74%) came out of the pandemic in better shape than going in. The bank's stock appreciated more than 38% during the first six months of this year. In October of 2020, Schwab closed on its acquisition of TD Ameritrade, giving it a combined $5.1 trillion of client assets and 24.1 million brokerage accounts. The deal also could create as much as $4 billion in synergies once fully integrated.
Additionally, the pandemic didn't hurt Schwab nearly as much as some banks. Schwab reported a profit of nearly $3.3 billion in 2020, down from roughly $3.7 billion in 2019. Loans aren't a huge part of Schwab's balance sheet, so losses from those operations weren't as big of a concern for Schwab as some other large banks. Schwab is also very asset sensitive, meaning that more of its assets would reprice with interest rates than liabilities. On its regulatory filing for the quarter ending March 31, the company said that a 1% gradual increase in market interest rates would result in 14.2% additional net interest revenue over the next year.
