One of the coolest trades of the year can get a boost from the earnings season.
Gerard Cassidy of RBC Capital Markets expects finances to exceed Wall Street expectations when they begin reporting this week.
“The big beats are likely to come from the loan loss reserve release numbers,” CNBC’s chief trading officer for CNBC’s “Trading Nation” said on Friday. “Last year, due to the pandemic, the banking industry set aside billions of dollars in anticipated credit losses, and reserves for those losses were not used.”
Finance was the third lowest performing S&P 500 group in 2020, behind energy and real estate. So far this year, the selected SPDR Financial Fund, which targets the group, has grown by over 19%.
According to Cassidy, this is about to change. He believes that the banking sector will be among the best 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 the first quarter to be the biggest factor in the pace of earnings, partially offset, albeit with a slower rise in net interest income and perhaps even net interest margin pressure.”
JPMorgan Chase opens its earnings season on Wednesday – alongside Goldman Sachs and Wells Fargo.
Cassidy anticipates that Bank of America, which reports quarterly results on Thursday, will be the biggest winner. This year it increased by 32%.
He lists strong management, his broad exposure to the US recovery, and miscellaneous revenue streams as high-key factors.
“Ninety percent of their business comes from the United States,” Cassidy said. “With the Federal Reserve forecasting a 6% growth in this country’s economy, they will be one of the biggest beneficiaries of this growth.”
Cassidy names Credit Suisse as the bank that now faces the most challenges. He cites his massive losses in connection with the implosion of the Archegos Capital hedge fund.
“There have been a number of leadership changes over the years in that organization,” Cassidy said. “Because of this, possibly, the controls and procedures were not as robust as they were at some of the US domestic firms.”
Credit Suisse shares have fallen by 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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