Summary List Placement
Wall Street earnings season is about to get into full swing.
Big US banks are set to give fourth-quarter and full-year 2020 results in the coming days. Goldman Sachs is also planning on giving an update on a multi-year plan it laid out at its first-ever investor day last year.
Executives will lay out key drivers of their businesses and could shed insight on expectations and initiatives for the year ahead. While the fourth-quarter results will likely look brutal compared to the year-earlier period, thanks to factors like higher loan-loss provisions, lower fee-based revenue, and a less favorable interest-rate environment, bank watchers are thinking less about what kind of damage the coronavirus pandemic has already wrought and more about what lies ahead.
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Meanwhile, bank stocks have been on a tear in recent weeks after struggling for much of 2020. The KBW Bank Index, which is a benchmark of banking-sector stocks, has risen some 35% since promising COVID-19 vaccine results were announced in early November.
“The market’s finally appreciating that an economic recovery is going to lead to higher profitability for the US banking sector, driven by lower credit costs, possibly wider margins, and fundamental loan growth led by the consumer, and that’s now showing up in stock prices,” Gerard Cassidy, head of US bank equity strategy at RBC, told Insider.
Still, any economic recovery could have some drawbacks when it comes to banks growing their loan books. If the economy is doing better, some reason, banks might see loan volume fall, not rise. It’s a tradeoff banks might expect in the new year as credit losses ease, D.A. Davidson equity analyst David Konrad told Insider.
Key to the story as well, of course, are interest rates. Net interest margin, or the difference between the interest banks charge borrowers and the interest they pay on deposits, is a key profitability metric. These margins collapsed this year as the Federal Reserve cut rates to near zero at the onset of the COVID-19 pandemic, but could be bolstered if a strong economic recovery takes hold, inflation expectations pick up, and longer-term interest rates begin to rise.
“If the curve stays where it is today, we see less downward pressure on the margin. But if it increases, we think there could be actual margin expansion for the group by the end of the year,” said RBC’s Cassidy.
It’s not so much that the Fed might raise its benchmark rate in the near term — the Fed has signaled that a rate hike might be off the table until 2023 — but rather that a steepening yield curve could play out favorably for banks.
“If the yield curve steepening, if the long end of the curve really blowing out, is a sign that the economic environment is materially improving and that we’re on a sustained path towards economic growth, then it makes …read more
Source:: Business Insider