EC Big Banks Foreshadow The Improving 2021 Earnings Picture

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We are off to a great start in the Q1 earnings season, with the big banks coming out with a much stronger profitability picture relative to what they were able to show in the preceding periods. This reconfirms our bullish earnings outlook that envisions estimates going up significantly over the coming months as the full extent of the economic rebound gets clearer.

The positive bank results aren’t just reflective of business conditions in the first quarter of 2021, but rather a function of growing optimism about the coming quarters, notwithstanding the still unsettled Covid situation in major parts of the world outside the U.S.

The big banks released billions in loan loss reserves that they had set aside at the start of the pandemic to cover loans going bad as a result of Covid-related stresses. Needless to say, many of those negative scenarios didn’t come to fruition, thanks to aggressive fiscal and monetary measures.

In effect, these banks are saying, through these reserve releases, that they expect economic conditions in the coming quarters to be stronger relative to what they had originally modeled. This creates a favorable read-through for all sectors, particularly the economically sensitive ones.

The unusually high year-over-year growth rates for bank earnings are primarily a function of easy comparisons and the aforementioned reserve releases. But that’s not to suggest that there wasn’t genuine strength in the quarterly numbers, as the group’s capital markets business was off-the-charts good. Trading volumes, equity underwriting, and M&A activities were very strong during the period, more than offsetting continued weakness in the core banking business with soft lending and margin issues.

The margin picture is on track to improve markedly in the coming quarters as the yield curve has steepened, though the outlook for lending demand still remains uncertain. The hope is that loan demand should improve in the second half of the year as the recovery takes hold and the pandemic loses its bite.

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William K. 4 weeks ago Member's comment

Of course the big bank would be doing well. They pay no interest on deposits and still charge a lot on loans. How could they possibly not do well?