The euphoria around the reopening of the economy in the U.S., Europe, and Japan sent bank stocks higher in the last week. Wells Fargo (NYSE:WFC) would have enjoyed a more than 8% return if profit-takers did not sell the stock last Friday. What should investors do with bank shares?
Canadian banks reported quarterly results that showed the full extent of the oil market collapse and the worrisome provisions for mortgages and credit losses. Yet TD Bank (TSX:TD), CIBC (TSX:CM), Royal Bank (TSX:RY), and Scotiabank (TSX:BNS) all rose on the week. Investors are betting that the worst is over.
A slow re-start in the economy is not the biggest risk factor for banks. COVID-19 infection rates are still the bigger risk. In South Korea, school re-openings led to a spike in infections. In Quebec, the aggressive re-opening and school openings also resulted in higher daily infections. These data points suggest that the "new normal" will require tight checks for fevers, enforced social distancing, and more online versus in-person commerce.
Banks will need to continue supporting its customers and donating to charity groups. It must continue monitoring for higher credit losses and mortgage defaults. Investors made the easy money already and should not chase the stock at this point.
