Credit and Climate Top Mike Mayo’s Bank Earnings Watchlist

Investors should keep an eye on credit trends, capital markets, potential share buybacks and expenses when banks report first-quarter earnings this week, according to Wells Fargo analyst Mike Mayo.

Climate issues are also moving toward the spotlight for the first time as well, joining traditional themes like the yield curve and the mortgage market, Mayo said in a phone interview. He cited getting his first-ever question on climate from a banks investor, not an ESG-oriented investor, in recent weeks, and added that Citigroup Inc.’s new Chief Executive Officer Jane Fraser spoke about climate on her first day on the job. The Federal Reserve and others are also making new regulatory efforts in the space.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. report before the bell on Wednesday, with Bank of America Corp. and Citigroup following on Thursday and Morgan Stanley on Friday.

Bank stock outperformance hasn’t been this strong at this point in the year since 2010, with the KBW Bank Index surging 25% to date, topping the S&P 500’s 10% gain. The bank index shed as much as 2.2% on Tuesday amid concern about longer economic recovery and reopening timelines as J&J paused its vaccine, retreating from Monday’s all-time high close.

Bloomberg Intelligence: Not Just a Fluke: Financials to Take S&P Lead on Macro, Buybacks

Credit and Climate Top Mike Mayo’s Bank Earnings Watchlist

Mayo also expects reserve releases of at least 10%, which would be slightly below the levels seen in the fourth quarter. Reserve releases allow banks to free up some of the funds they set aside for bad loans when economic times were tough, and flow straight through to earnings.

How far banks go beyond that remains to be seen, he said, pointing to JPMorgan CEO Jamie Dimon’s recent investor letter, which referred to a Goldilocks environment and a boom lasting until 2023. It would be “impossible not to have a material release” if Dimon’s predictions are correct, he said, adding that vaccine roll-outs since the end of last year and $1.9 trillion in government stimulus have added additional fuel to the economic fire.

Read more: Reserves May Signal Whether Bank Stock Rally Has Legs

Calculations by Bloomberg Intelligence’s Alison Williams and Neil Sipes show that consensus calls for JPMorgan, BofA, Citigroup, and Wells Fargo to together release about $3.4 billion. That’s roughly 9% of the remainder of the reserves those banks had built up during the first half of last year, when the pandemic raged. That amount would be shy of the 13% of the build those four banks released in the fourth quarter.

“Everything has flipped thanks to vaccines and re-opening prospects,” said Christopher Marinac, Janney’s director of research. He forecasts the top 24 U.S. banks will release more than $6 billion in reserves in the quarter, driven by lower-than-expected net charge-offs and revisited calculations for accounting rules known as CECL, as credit-cycle losses will be less than feared.

Analysts also expect to see sluggish loan growth, while investment-banking fees are expected to jump with SPACs fueling record equity underwriting. Morgan Stanley’s Betsy Graseck said on Friday that she’s flipped her earlier forecast for a decline in trading to a gain, due to active IPO and SPAC markets. Her bullish stance on banks is due in part to credit doing “phenomenally well.”

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