One of the hottest trades of the year could get a boost from the winning season.
RBC Capital Markets’ Gerard Cassidy expects the financial data to beat Wall Street’s expectations when it starts reporting this week.
“The big successes are likely to come from the publication of the figures for the loan loss reserve,” the head of US equity strategy of the company told CNBC “Trading Nation” on Friday. “Last year the banking industry set aside billions of dollars in expected credit losses because of the pandemic, and the reserves for those losses were not used.”
Financials were the third worst S&P 500 group in 2020 after energy and real estate. To date, the Financial Select Sector SPDR Fund, which tracks the group, is up more than 19% this year.
That will change, according to Cassidy. He believes the banking sector will be among the best this year due to the unprecedented economic recovery.
“That was not taken into account last year when the banks put that money aside to cover those losses,” he said. “So we expect this to be the main driver of the profit jump in the first quarter, which will be partially offset by slower net interest income growth and possibly some pressure on net interest margin.”
JPMorgan Chase kicked off winning season on Wednesday – alongside Goldman Sachs and Wells Fargo.
Cassidy believes Bank of America, which releases quarterly results on Thursday, will be the biggest winner. So far this year it’s 32%.
He names strong management, broad exposure to the US recovery, and diverse revenue streams as the main bullish drivers.
“Ninety percent of their business comes from the US,” said Cassidy. “With the Federal Reserve forecasting 6% economic growth in this country, you will be one of the biggest beneficiaries of that growth.”
Cassidy names Credit Suisse as the bank currently facing the greatest challenges. He cites his massive losses in connection with the implosion of the Archegos Capital Hedge Fund.
“There have been a number of management changes at this organization over the years,” said Cassidy. “Because of this, the controls and procedures may not have been as solid as some US domestic companies.”
Credit Suisse stocks are down more than 26% since March 1.
Disclosure: RBC Capital Markets has investment banking relationships and / or non-investment banking relationships with JPM, BAC MS, GS and CS.
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