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RBC's Gerard Cassidy on his biggest takeaways from bank earnings

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Gerard Cassidy, of RBC Capital Markets, joined Yahoo Finance Live to breakdown today's big bank earnings.

Video Transcript

SEANA SMITH: Banks today closing in the red. Following a couple of earnings reports this morning, we heard from JP Morgan, Citi, and Wells Fargo. JP Morgan was a standout among the group but still the stock closing in the red today. We want to bring in Gerard Cassidy. He's of RBC Capital Markets. And Gerard, I think a lot of investors were closely watching these results really to gauge where we are in the economic recovery. What do these numbers tell you about that?

GERARD CASSIDY: The numbers were very interesting. Because they were good. As you know, the stocks this year have been one of the best performing groups within the S&P 500. Through last evening, the S&P banks were up approximately 12% year-to-date versus the market being up 1%. So I think this is a classic buy the rumor, sell the news. And there was some profit taking being done today.

When you look at the actual trends and what we saw in the numbers, probably the one trend that is by far the most important for the next 12 to 18 months is credit. And as you recall, because of the pandemic the banks have set aside billions of dollars to handle elevated credit losses. Well, this quarter they reversed that out. All of the big banks have reported today at so-called negative loan loss provisions.

And in essence, they're drawing down some of the money that was set aside earlier in the year when the economic numbers were going to be far worse than they turned out to be. So the credit picture, which is the big driver of earnings for the banks, was actually quite good. Now, we still expect elevated credit losses next year or in 2021. But that was certainly one of the big stories today, along with the capital market numbers.

- Should shareholders expect some of that drawdown to be returned to them in future quarters, whether it be through stock buybacks or dividends? I mean, we're still waiting for direction on that, right?

GERARD CASSIDY: You're absolutely right. And the short answer is yes. Shareholders should expect that. In December, the Federal Reserve lifted the temporary suspension of share repurchases that the banks-- that was put into place in the second half of last year. Our big banks for over 10 years now have been going through an annual stress test. Those results for 2021 will be released in June.

And we anticipate that the banks will do well. And we anticipate also that the limitation that the Fed has put on share repurchases today will be lifted, and the banks will be able to be more aggressive in the second half of the year. But you're absolutely right. The banks are very well capitalized. They navigated through the downturn very effectively compared to 2008 and 2009.

And I think what you're going to find is that, as a reason to own bank stocks, is we should expect to see dividends go higher this year and more money being spent on share repurchases as well.

SEANA SMITH: Gerard, we saw a drop in net interest income from all three of these names this morning. I guess, two-part question here, how big of a headwind do you see this being for the remainder of this year? And then also, to what extent has fees offset some of that weakness?

GERARD CASSIDY: No, you're bringing up a good point. The net interest revenue certainly in 2020 was negative-- negatively affected by the drop in interest rates but also the pullback in borrowers, not just commercial but consumer borrowers as well. So as we go into '21, those headwinds are still going to be there. Less so though, we expect that the net interest margin pressure will not be as severe as what we saw in 2020.

But it will still be somewhat of a headwind. But you also bring up another good point. The fee revenues were quite strong, particularly in the capital markets area. When you take a look at the DCM business, that's debt capital markets, for example, it was all-time record issuance of debt, both investment grade and high yield debt in 2020. You're probably also noticing the activity in the IPO market. The equity capital markets also had a strong year.

So I would say that the fee revenues, particularly from the companies that have capital market businesses, were quite strong. We think in '21, those fees will remain healthy, driven by deposit fees but also credit card fees and debit card fees as consumers gain their confidence about the economy in the second half of the year, as the vaccines are widely dispersed hopefully by the middle of the year and people start to spend money and that will support the stronger the revenue growth in the second half of the year.

SEANA SMITH: All right, Gerard Cassidy, always great to have you on of RBC Capital Markets. Have a great weekend.