One of the hottest trades of the year can get a boost from the earnings season.
Gerard Cassidy of RBC Capital Markets expects the financial situation to exceed Wall Street expectations when they start reporting this week.
“The big beats will likely come from the credit loss reserve releasing numbers,” the head of US banks’ equity strategy told CNBC’s “Trading Nation” on Friday. “Last year, as a result of the pandemic, the banking sector set aside billions of dollars for expected credit losses, and reserves for these losses were not used.”
Financials was the third worst performing S&P 500 group in 2020, after energy and real estate. So far this year, the Financial Select Sector SPDR Fund, which the group tracks, is up more than 19%.
According to Cassidy, that is about to change. He believes the banking sector will be among the top performers this year due to the unprecedented economic recovery.
“That was not taken into account last year when the banks put this money aside to cover these losses,” he said. “So we expect this to be the main driver of earnings in the first quarter, but partially offset by slower net interest income growth and perhaps some pressure on net interest margins as well.”
JPMorgan Chase will usher in earnings season on Wednesday – along with Goldman Sachs and Wells Fargo.
Cassidy expects Bank of America, which reports quarterly results on Thursday, to be the biggest winner. This year it is up 32% so far.
He cites strong management, his broad exposure to the US recovery and diverse income streams as the main optimistic drivers.
“Ninety percent of their business is from the United States,” said Cassidy. “With the Federal Reserve forecasting the growth of this country’s economy at 6%, they will be one of the biggest beneficiaries of that growth.”
Cassidy calls Credit Suisse the bank that currently faces the most challenges. He cites his massive losses related to the implosion of Archegos Capital’s hedge fund.
“There have been a number of management changes in that organization over the years,” said Cassidy. “Therefore, controls and procedures may not have been as robust as some domestic US companies.”
Shares of Credit Suisse are down more than 26% since March 1.
Disclosure: RBC Capital Markets has investment banking and / or non-investment banking relationships with JPM, BAC MS, GS and CS.
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