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4 Key Themes to Dominate Major U.S. Banking Space in 2021

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Major U.S. banks had an eventful 2020. The coronavirus pandemic hit banks hard as business activities came to a grinding halt, the Federal Reserve cut interest rates to near-zero and there was hardly any appetite for commercial and consumer loans. Despite these odds, banks showed incredible resiliency by focusing more on fee income sources of revenues amid a tough operating backdrop.

Here are four primary things to expect from major banks this year:

1. More Reserve Releases

As the pandemic hit in mid-March, major banks set aside tens of billions of dollars for future potential loan losses. This significantly hurt their profits.

While the initial stimulus package somewhat helped in containing delinquencies, banks modeled for no second round of stimulus. Now already there is the second one and President-elect Joe Biden has also unveiled a relief package worth up to $1.9 trillion.

More stimulus will likely mean fewer losses for the banking sector, and if there is a faster-than-expected economic recovery, other losses that had been taken into consideration for reserve calculations may not be incurred. Thus, this would allow major banks, including JPMorgan (JPM - Free Report) and Bank of America (BAC - Free Report) , to release more reserves (which will probably be billions of dollars) back in to the income statement and thereby boost earnings.

It’s noteworthy that JPMorgan and Citigroup (C - Free Report) began this process last year itself, though on a smaller scale.

2. Share Buybacks & Dividend Hike

Since mid-March 2020, major banks had paused share repurchases – first voluntarily and then getting conditional approvals from the Fed only for paying dividends and not buying back shares. Banks were barred from increasing dividend payouts. The firms could maintain dividends at same level only if they earned sufficient profits. Therefore, Wells Fargo (WFC - Free Report) had to slash quarterly dividend by 80%.

Nonetheless, following “the second round” of stress test in December 2020, the Fed eased capital distribution limits. Major banks can now repurchase shares and maintain dividend payouts. Yet, the total distribution will be based on income earned over the past year. Following this, several major banks, including JPMorgan and Wells Fargo, have already announced their buyback plans for 2021.

Further, if coronavirus vaccines prove effective and economic recovery happens quickly, the Fed might do away with all restriction on capital distributions. Thus, major banks are also likely to increase their quarterly dividends.

3. Lower Revenues, Rise in Profitability

As the things stand today, it is expected that major banks are likely to witness lower revenues this year compared with 2020. This is likely to be mainly due to fall in net interest income, given the ultra-low rates and soft loan demand (at least in the first half of 2021). Although banks’ fee income sources – trading, investment banking, mortgage and card fees – are expected to remain strong, these are likely normalize a bit in 2021 after a stellar performance last year.

Despite a decline in top line, major banks’ profits are expected to improve largely driven by potential reserve releases, share buybacks and better loan demand in the later part of the year.

4. Business Restructuring

After pandemic hit, major banks began re-evaluating their business structure to improve operating efficiency. The primary aim is to simplify operations and do away with non-core, unprofitable ones. Wells Fargo is just doing the same on a bigger scale, while Truist Financial (TFC - Free Report) is taking similar steps as it integrates businesses following the merger between BB&T and SunTrust.

Further, with sufficient liquidity in hand, banks plan to expand through strategic buyouts. Already last year, PNC Financial (PNC - Free Report) , after divesting its 22.4% ownership stake in BlackRock, inked a deal to acquire BBVA USA Bancshares, Inc. for $11.6 billion in cash. Also, a smaller regional bank – Huntington Bancshares announced an all-stock merger deal with TCF Financial Corporation, which will put the combined entity among the top 10 U.S. regional banks.

Further earlier this month, U.S. Bancorp (USB - Free Report) agreed to acquire the debt servicing and securities custody services client portfolio of MUFG Union Bank, N.A. The deal is part of the bank’s efforts to increase presence on the West Coast.

Even the biggest U.S. bank – JPMorgan – is not averse to expanding inorganically. Despite being too big to be allowed to acquire another bank, there are no such restrictions on expanding other businesses via this route. Last month, at an investors’ conference, the company’s CEO Jamie Dimon signaled that the bank is considering buying asset management businesses or financial technology companies to accelerate growth.

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