Optimism over the post-pandemic economy is building as the vaccine rollout continues, a theme that will likely carry through the large banks’ earnings reports due this week.
Bank stocks were among the worst performing stocks in the teeth of the pandemic. But an improving economic outlook has had investors piling into financials since late last year, raising the question: can the bank stocks extend the rally?
“There’s more to go with the catch-up trade for bank stocks,” said Mike Mayo, senior equity analyst at Wells Fargo.
One positive development for banks is higher longer-term interest rates.
With job gains surging in March and consumer confidence rising to the highest levels seen during the pandemic, longer-term bond yields have tilted higher. The U.S. 10-year Treasury has gained as much as 65 basis points since mid-January.
Those rising bond yields suggest that banks are able to lend at higher rates, which in theory should be positive for earnings.
Banks could also offer guidance this week on another potential driver: loan growth.
Deutsche Bank Research analyst Matt O’Connor expects loan paydowns from stimulus checks to keep loan growth slow for now, but says a more developed vaccine rollout later this year could tee up strong spending this holiday season and beyond.
“There could be another 30%-50% upside in bank stocks over the next 2-3 years,” O’Connor wrote in a client note, framing an argument for bank stocks being cheap at the moment.
Loan loss reserves
Analysts will also be closely watching the large banks for how they are managing the billions of dollars in buffers set aside last year to absorb possible loan losses.
In recent quarters, banks have begun releasing the so-called allowance for loan losses. In January, the big four (JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo) released $5.7 billion in reserves set aside last year to absorb loan losses.
But the firms still had $91 billion in total reserves as of the last reported quarter, more than double pre-pandemic levels. Management said in January that they were conservative on their provisioning because of the uncertainty over whether or not the banking industry had weathered the full storm of loan delinquencies.
Mayo said that the vaccine rollout, a fresh round of $1.9 trillion in federal stimulus, and the improving outlook should allow banks to pull-forward more reserve releases to this quarter.
“These reserves for problem loans are really based on your forecasts and how you feel, so credit quality should be much better,” Mayo told Yahoo Finance Tuesday.
Not all analysts expect the same.
RBC Capital Markets analyst Gerard Cassidy said he actually expects banks to increase loan loss provisions on a quarter-over-quarter basis, although he acknowledges that his forecasts “may prove to be too conservative.”
JPMorgan Chase (JPM), Goldman Sachs (GS) and Wells Fargo (WFC) will kick off earnings season on Wednesday morning. Bank of America (BAC) and Citigroup (C) will report on Thursday with Morgan Stanley (MS) due on Friday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.