One of the hottest trades of the year can get a profit season boost.
Gerard Cassidy of RBC Capital Markets expects financial resources to exceed Wall Street expectations when they begin reporting this week.
“The big rhythms are likely to come from the release of the loan loss reserve,” the head of U.S. equity strategy told CNBC’s “Trading Nation” on Friday. “Last year, due to the pandemic, the banking industry set aside billions of dollars in projected credit losses and the reserves were not used for those losses.”
Financial data was the third worst-performing S&P 500 group in 2020, behind energy and real estate. So far this year, the Sector Select Financial Fund SPDR, which monitors the group, has increased by more than 19%.
According to Cassidy, this is about to change. He believes the banking sector will be one of the best performers this year due to the unprecedented economic recovery.
“This was not taken into account last year when the banks set aside this money to cover these losses,” he said. “So we expect that in the first quarter this will be the big driver of the earnings slump, partially offset, albeit with slower growth in net interest income and perhaps also some interest margin pressure.” .
JPMorgan Chase opens profit season on Wednesday, along with Goldman Sachs and Wells Fargo.
Cassidy predicts that Bank of America, which reports quarterly results on Thursday, will be the biggest winner. This year it has increased by 32%.
It lists strong management, its extensive exposure to the U.S. recovery, and various revenue streams as the main bullish factors.
“Ninety percent of his business comes from the United States,” Cassidy said. “With the Federal Reserve forecasting that the growth of this country’s economy will reach 6%, they will be one of the biggest beneficiaries of this growth.”
Cassidy names Credit Suisse the bank with the most challenges right now. He cites his massive losses in connection with the implosion of the Archegos Capital hedge fund.
“There have been several changes in direction over the years in this organization,” Cassidy said. “Because of this, possibly the controls and procedures were not as robust as they have been in some of the national companies in the United States.”
Shares of Credit Suisse have fallen more than 26% since March 1.
Disclosure: RBC Capital Markets has investment banking relationships and / or non-investing banking relationships with JPM, BAC MS, GS and CS.
Exemption from liability