Big banks set to give investors good earnings news

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Federal Reserve Chair Jerome Powell will be answering questions on Capitol Hill on Tuesday, and some will surely be targeted at the Fed’s plans to raise interest rates in the coming months.

Some interested parties are the leaders of the big banks, many of which will report their fourth-quarter 2021 earnings this week.

Analysts expect banks to talk of record earnings, but some of that has to do with simple accounting. Many banks set aside a lot of money to offset possible loan defaults at the height of the pandemic, according to Jason Ware, chief investment officer at Albion Financial Group.

“And as the recovery took hold last year, they moved these reserves back over into the profit line of the income statement,” he said.

Which, he said, is standard practice — no funny business. But as a result, “there was a major tail wind last year from these loan-loss provisions being moved back over to the income statement that provided a big boom to earnings,” Ware said.

Investors expect the good times to keep rolling in 2022. Specifically because yields on the loans banks make could rise as a result of the Fed’s monetary policy decisions.

But these days, a financial institution’s profitability depends less and less on the core business of consumer banking and more on the other things banks do, per Sheraz Mian at Zacks Investment Research.

“The capital markets, investment banking, mergers and acquisition, initial public offerings, our trading business, all of that is practically firing on all cylinders,” he said.

Banks have historically been conservative when it comes to new areas of potential growth, Mian aid. And while more are hiring cryptocurrency managers to test the waters, Ken Leon, director of equity research at CFRA, said many will wait for clear regulation before they jump in.

“So whether crypto is a currency, how’s it defined as an instrument or security? No one’s going to put their foot on the pedal in these areas until there’s clarity, really, from Washington,” Leon said.

But he said banks are also cognizant that customers may go elsewhere if they can’t invest in things like crypto with them.