One of the year’s most popular deals could get a boost from the earnings season.
Gerard Cassidy, RBC Capital Markets, expects financial statements to exceed Wall Street expectations when they begin reporting this week.
“The big blows are likely to come from the release of the loan loss reserve,” the firm’s head of the U.S. banking equity strategy told CNBC’s “Trading Nation” on Friday. “Because of the pandemic, the banking industry set aside billions of dollars in expected credit losses last year, and the reserves for these losses were not used.”
Finance was the third S&P 500 group to perform the worst in 2020, behind energy and real estate. So far this year, the SPDR fund of the Financial Select Sector, which follows the group, is rising by more than 19%.
According to Cassidy, that is going to change. He believes that the banking sector will be one of the best performers this year due to the unprecedented economic recovery.
“It was not taken into account last year when the banks set aside this money to cover these losses,” he said. “We therefore expect it to be the biggest driver of earnings in the first quarter, partially offset, but with a slower growth in net interest income and perhaps also net interest pressure.”
JPMorgan Chase ushers in the earnings season on Wednesday – along with Goldman Sachs and Wells Fargo.
Cassidy expects Bank of America, which reports its quarterly results on Thursday, to be the biggest winner. It has risen 32% so far this year.
He cites strong governance, its wide exposure to the US recovery and diversified revenue streams as the key factors.
“Ninety percent of their business comes from the United States,” Cassidy said. “With the Federal Reserve’s forecast that the growth of the country’s economy will amount to 6%, they will be one of the biggest beneficiaries of the growth.”
Cassidy cites Credit Suisse as the bank that currently has the most challenges. He mentions his huge losses in connection with the explosion of the hedge fund of Archegos Capital.
“There have been a number of management changes over the years in that organization,” Cassidy said. “As a result, the controls and procedures may not have been as rigid as at some local U.S. businesses.”
Shares in Credit Suisse have fallen more than 26% since March 1.
Disclosure: RBC Capital Markets has investment banking relationships and / or non-investment banking relationships with JPM, BAC MS, GS and CS.
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