Big banking institutions including JPMorgan Chase (JPM) and Citigroup (C) will release their first-quarter earnings reports this week. As uncertainty from geopolitical conflicts and doubts over whether the Federal Reserve will even make interest rate cuts in 2024, some on Wall Street turn to the financial sector to peak into the health of the market.

RBC Capital Managing Director Gerard Cassidy joins Market Domination to break down expectations for upcoming bank earnings and the top themes investors should keep in mind.

Cassidy outlines his top picks for investors during this time: "I would say going into the earnings season, we have both a money center pick which doesn't report on Friday, which of course is Bank of America (BAC), they report the following Tuesday. But also, we would say that JPMorgan is a perennial favorite. It's done very, very well. It's owned by just about everybody around the world. But, Bank of America would be the favorite pick in the quarter..."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: Gerard, when you're talking to your clients, I'm curious, and they ask you, what's the one big risk for the banks, what do you tell them?

GERARD CASSIDY: It's a really good question because credit risk has always been one of the biggest risks for the banking sector. Last year, as you know, we saw three banks fail. And they didn't fail from the traditional reasons of credit risk. They failed because of liquidity risk.

But the real risk to any bank is bad credit. And so when we look at that topic, aside from the net interest income inflection, which is definitely going to be discussed on the calls this quarter, the other big topic will be credit quality and the direction of credit quality. We're all very aware of what's going on in the office space, particularly the class B and class C space in our major urban markets where vacancies in some of that space is as high as 50% or 60%. And those properties' values have declined off of peak levels upwards of 75% to 80%.

But class A properties, it's nothing like that. And so I think what you're going to find is more investors are going to realize that the US banking industry, its exposure, particularly amongst the top 20 banks, to the most troubled area for credit today, office, commercial, real estate is very limited. And it's nothing like what we saw in 1990 when it was truly a debacle for the banks.

JULIE HYMAN: So that seems like it will be potentially positive news if the banks can convince investors that is the case. I'm curious if we're going to get some upward revisions from these banks' raised forecasts. And if so, which are the most likely contenders?

GERARD CASSIDY: It's really the point of the banks this year will be what you just mentioned, upward revisions. Because last year, if you take a look at the estimates, ours included, the revisions throughout the year because of lower net interest income growth for most banks, not all of them. JP Morgan is an exception. But primarily due to lower net interest income and higher provision for credit losses, most estimates came down throughout 2023.

And now, if the US economy is truly on a growth path this year of 2% to 2 and 1/2%, as Ed Yardeni mentioned in a prior segment here, I would suggest that the upward revisions this year could come from two areas. One, the banks last year, because of the new accounting for loan-loss reserves called CECL, Current Expected Credit Losses, the CECL accounting built up reserves in 2023 for the likelihood of a recession. And that doesn't seem to be the case now. So there could be, believe it or not, this year some reserve releasing due to the resiliency in the economy.

Now, nobody pays up for those earnings, we understand that. But it builds up capital, which means stronger buybacks. The other area of potential upward revisions is what we just discussed, which is that the Fed cuts once or twice this year and the banks' net interest income inflects stronger than expected. Then you're going to see higher earnings estimates as well. And as you guys know, upward revisions in earnings estimates generally is a favorable trend for stock prices.

JOSH LIPTON: And Gerard, let's get into some specific names here. As we head into earnings season, what's your top pick, Gerard?

GERARD CASSIDY: I would say that going into the earnings season, we have both a money center pick, which doesn't report on Friday, which, of course, is Bank of America. They report the following Tuesday. But also we would say that JP Morgan is a perennial favorite. It's done very, very well. It's owned by just about everybody around the world, but Bank of America would be the favorite pick in the quarter.

And then for a regional name, there's two of them. Fifth Third and KeyCorp both based, of course, out of Ohio. KeyCorp has the big derivatives book and treasury portfolio that will be repriced this year. And Fifth Third is just a basic blocking and tackling grinding out steady growth led by their consumer banking and consumer deposit business, which is especially down in the Southeast, which is quite positive.