What a difference a year makes. A year ago, bank stocks were being pummeled for their perceived exposure to the coronavirus pandemic, pushing the 24-member KBW Bank Index down by as much as 50% from their start of 2020. This year, analysts have been busy revising the industry's earnings estimates upwards, thanks in part to expectations that banks will release some of the tens of billions of dollars in loan loss reserves set aside in 2020 and that reopening economies will drive spending and loan growth. In fact, Barclays analyst Jason Goldberg boosted first quarter 2021 earnings estimates by a median 16% last week for banks in his coverage, driven by reserve releases and his forecast for strong investment banking and trading results. He now thinks per share earnings will jump by a median 80% compared to the first quarter of 2020, when banks were forced to set aside money for expected loan losses. The KBW Bank Index has gained 25% so far this year, outpacing the 9.8% gain of the S & P 500 Index. JPMorgan Chase , the biggest U.S. bank by assets, kicks off first-quarter earnings season for big banks on Wednesday at about 7 a.m., followed by Goldman Sachs and Wells Fargo . Bank of America and Citigroup are scheduled to report results Thursday, and Morgan Stanley follows on Friday. Here's what to look out for. Reserve Releases The combined credit loss allowance of 20 big banks tracked by Goldberg reached a peak of $165 billion in the middle of 2020. That dropped by $7 billion in the fourth quarter, when big banks including JPMorgan began releasing loan loss reserves (money previously set aside in anticipation of soured debt from credit cards to corporate borrowers) in earnest. The move can have an outsized impact on a quarter: JPMorgan beat fourth quarter expectations in part on a $2.9 billion reserve release. Several factors point to the continued release of loan loss reserves, which happens when improving economic conditions result in expectations for fewer borrowers going into default. Job growth exceeded estimates last month amid the vaccine rollout, pushing U.S. unemployment to 6%, which is lower than banks' estimates created in late 2020, Goldberg said. In March, Congress passed the Biden administration's $1.9 trillion stimulus, adding further to previous efforts to support the unemployed and inject money into U.S. households. Investment Banking & Trading Many parts of the capital markets ecosystem have been seeing robust activities, fueled by record issuance of SPACS, the blank check companies that saw more issuance in the first quarter than in all of 2020, itself a record year. The industry's investment banking fees, driven by strong stock underwriting in particular, may rise 40% from a year earlier to a record high, according to Goldberg. The SPAC boost has kept underwriters busy and boosted demand for companies to be acquired, resulting in a record 292 deals announced valued at $1 billion or greater, according to JPMorgan. While investment banking is expected to be a highlight for firms including Goldman Sachs and JPMorgan, trading is also expected to be a tailwind. Trading revenues at the five biggest U.S. banks will rise 15% in the first quarter, in part helped by buoyant stock prices and a 41% jump in average daily share volume. The combined investment banking and trading results for the five banks is expected to approach a record $43 billion for the quarter, Goldberg said . Loan growth One area of weakness for banks recently has been loan growth: While banks are awash in deposits, they have found fewer qualified borrowers. Consumers are still saving money at an elevated rate, and big corporations used debt and equity issuances last year to replace multi-billion dollar credit lines. Total loans for the industry are expected to drop by 2% versus late 2020, according to Matt O'Connor of Deutsche Bank. But the reopening of economies amid the vaccine rollout could result in a "sharp rise" in the back half of this year, said O'Connor. He called loan growth "the next big catalyst for bank stocks." Buybacks & Dividends? Since last June, banks have been limited in how much money they could plow into share repurchases and dividend increases, as regulators pushed the industry to be more conservative with capital amid the pandemic. Now, analysts will be keen to hear what bank executives have to say after the Federal Reserve said banks that pass the industry's 2021 stress test will be allowed to resume higher levels of dividend payouts and buybacks starting June 30. Since dividends have been stagnant for a year, payouts may increase in the second half of this year, Goldberg said.
