Barclays analyst Jason Goldberg recently raised his first quarter 2021 profit expectations by a median of 16 percent. Before loan losses were projected to cause banks to lay aside money, he now expects that per-share profits would rise by a median of 80 percent.
The KBW Bank Index has gained 25% so far this year, outpacing the S&P 500 Index’s 9.8 percent gain.
JPMorgan Chase, the largest bank in the United States by assets, will kick off the first-quarter earnings season for big banks on Wednesday around 7 a.m., followed by Goldman Sachs and Wells Fargo. Bank of America and Citigroup are set to report earnings on Thursday, with Morgan Stanley following on Friday.
Here are some things to keep an eye out for.
The combined credit loss allowance of Goldberg’s 20 largest banks reached a high of $165 billion in the middle of 2020. This fell by $7 billion in the fourth quarter, when major banks such as JPMorgan started releasing loan loss reserves (money previously set aside in anticipation of soured debt from credit cards to corporate borrowers) in earnest.
The move has the potential to have a large impact on a quarter: JPMorgan beat fourth-quarter expectations in part due to a $2.9 billion reserve release.
Several factors point to the continued release of loan loss reserves, which occurs when improving economic conditions result in fewer borrowers defaulting.
Job growth exceeded expectations last month as a result of the vaccine rollout, pushing U.S. unemployment to 6%, which is lower than banks’ estimates for late 2020, according to Goldberg. In March, Congress approved the Biden administration’s $1.9 trillion stimulus package, which added to previous efforts to help the unemployed and inject money into American households.
Trading and Investment Banking
Many parts of the capital markets ecosystem have seen brisk activity, fueled by record issuance of SPACS, the blank check companies, which saw more issuance in the first quarter than in the entire year of 2020, which was already a record year.
According to Goldberg, investment banking fees in the industry may rise 40% from a year ago to a record high, owing to strong stock underwriting in particular. According to JPMorgan, the SPAC boost has kept underwriters busy and increased demand for companies to be acquired, resulting in a record 292 deals worth $1 billion or more being announced.
While investment banking is expected to be a strength for firms such as Goldman Sachs and JPMorgan, trading is expected to be a drag. Trading revenues at the five largest U.S. banks will rise 15% in the first quarter, aided in part by rising stock prices and a 41% increase in average daily share volume.
According to Goldberg, the combined investment banking and trading results for the five banks are expected to approach a record $43 billion for the quarter.
One recent area of weakness for banks has been loan growth: while banks are flush with deposits, they are finding fewer qualified borrowers. Consumers continue to save money at a high rate, and large corporations used debt and equity issuances last year to replace multi-billion dollar credit lines.
According to Deutsche Bank’s Matt O’Connor, total industry loans are expected to fall by 2% compared to late 2020. However, the reopening of economies as a result of the vaccine rollout could result in a “sharp rise” in the second half of this year, according to O’Connor. He referred to loan growth as the “next big catalyst for bank stocks.”
Dividends and stock buybacks?
Banks have been limited in how much money they can put into share repurchases and dividend increases since last June, as regulators pushed the industry to be more conservative with capital in the face of the pandemic.
Analysts are now eager to hear what bank executives have to say after the Federal Reserve announced that banks that pass the industry’s 2021 stress test will be able to resume higher levels of dividend payouts and buybacks beginning June 30. Dividends may increase in the second half of this year after remaining flat for a year, according to Goldberg.