Analyst breaks down 'very strong' earnings from big banks

Earnings season kicks off with big banks JPMorgan, Wells Fargo and Goldman Sachs. RBC Capital Markets Head of U.S. Bank Equity Strategy and Large Cap Bank Analyst Gerard Cassidy joins Yahoo Finance Live to discuss.

Video transcript

AKIKO FUJITA: Let's bring in Gerard Cassidy, RBC Capital Markets head of US bank equity strategy and Large Cap bank analyst. Gerard, it's good to have you on today. As Brian pointed out, a record results for Goldman there. What stood out to you?

GERARD CASSIDY: The numbers were very strong across the board, as it was pointed out. And I would say that not only were the numbers strong, but the backlogs for both JP Morgan and Goldman Sachs in the investment banking businesses are very strong. And they talked about that at length on the Goldman Sachs call this morning about how quickly the backlog has replenished due to the combination of the strong capital markets and the outlook for the economy.

The economy, as you know, the Federal Reserve has pointed out they expect the US economy to grow at 6% real growth in 2021. We haven't seen growth like that since the 1980s. And that brings on more capital markets activity. So not only were the results strong for these companies, but their outlooks were quite robust as well.

ZACK GUZMAN: Yeah, when it comes to why we're seeing such a big boost there to Goldman Sachs, obviously, very strong. Any time you report record profits, very strong. JP Morgan there not to be outdone, quintupling of profits there. To you, though, what would be the thing that you think investors here are most focused in on? Because Brian was just talking about kind of unleashing the reserves that some of these banks had stockpiled, the questions around some of these loans. $5.2 billion JP Morgan let go there. I mean, was that something that we should be more focused on here as we look ahead to future quarters? What's your take on maybe what people are looking for in terms of projections moving forward?

GERARD CASSIDY: No, it's a really good question. And for the universal banks, the regional banks and community banks, rather than the investment banks, you're absolutely right. The loan loss reserve releases is a critical number. And it was quite large at JPMorgan Chase today. It was also showed up at Goldman, not as much as obviously JP Morgan, because they're not as diversified as JP Morgan. But also Wells Fargo.

So as we look forward over the next 12 months, because of what the banks did last year in anticipation that they were going to have sizable credit losses due to the pandemic and the economic collapse that we experienced in the second quarter, that never materialized, meaning the credit losses, because of the actions taken by the Federal Reserve, as well as the US government with their stimulus plans. And one of the outcomes of those actions was it flattened or possibly eliminated the credit cycle for the banks.

And so these loan loss reserve releases are going to continue to be meaningful as we go through now into the end of the year. And we should expect to see this. The banks, they're going to be reporting numbers tomorrow, like a Bank of America or a Citigroup. And the regional banks, we should see loan loss reserve releases being big drivers to earnings beats for the remainder of the quarter.

AKIKO FUJITA: Gerard, you talk about the positive outlook for growth here in the US. How much upside do you think that means for loan growth? And is this really a 2020 story, as more and more businesses look to come back online and expand in a big way? Or do you see this extending into the next year?

GERARD CASSIDY: No, you're really asking the critical question because eventually, the loan loss reserve releases will fade away. There's only a certain amount of money that they're going to release. There's still plenty left to release. But it needs to bring the banks to the next bridge, which is loan growth. And many of the banks are anticipating loan growth will pick up later in the year. The reason it's quite soft right now is that the liquidity at the consumer level, you see the savings rate. We're near record levels on consumer savings. The corporates are very liquid as well. So the demand for loans has been restricted due to this liquidity.

Now, this isn't entirely unusual, coming out of a recession. Loan growth normally takes about 18 months to get into gear after a recession. Now the reasons for the slow loan growth is different. Again, the liquidity. In the past, it would normally be due to the banks' hesitancy in lending due to the credit problems. But as we get into the end of the year, liquidity is drawn down. Companies are building out inventories, building plant and equipment.

Loan demand should pick up. And if you go back 75 years, loan growth is correlated very highly to nominal GDP growth. So if we get real growth of 6%-- let's call it 2% inflation-- we're talking 8% nominal growth. I think maybe we'll see that kind of annualized loan growth by the end of the year.

ZACK GUZMAN: Mr. Cassidy, just to return to the point you were making there about unwinding these loan protections, or the reserves, shall we say, here, and how that would bode well for growth in future quarters, I'd be curious just to get your take specifically on why we're seeing such muted action when it comes to JP Morgan right now. Because shares are down. Obviously, it was a big beat. So what might investors be looking at there if it seems like-- and I know you cover banks, but if I'm watching this play out and you get some big beats here and that's the way shares react, I'd be a little nervous about what the rest of earnings season might look like.

GERARD CASSIDY: No, it was a very fair question. This is when I'm envious of our tech stock counterparts because normally, when you get big beats, they do go up. I think in the case of JP Morgan specifically, they got at higher operating expenses in the quarter for the rest of the year. So that may have weighed on it. Also, they, unlike the other banks, have some capital restrictions with what they call the SLR, Supplementary Leverage Ratio.

And so, they're running up against this potential restriction on balance sheet growth that the other banks are not running up against. So it was somewhat unique to JP Morgan, even though, to your point, the beat was quite big. So I would expect others that put up big beats in the next week starting tomorrow and into next week, we should see better stock reactions than you're seeing from JP Morgan today.

ZACK GUZMAN: All right, Gerard Cassidy, RBC Capital Markets head of US bank equity strategy, always love having you on. Appreciate you sharing your insights there to kick us off on what's going to be a very exciting earnings season this time--