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Financial sector profits for Q1 2021 are on track to be among the best ever reported after banks released billions in reserves and saw explosive growth in deposits, investment banking and trading revenues. While those aspects of the banking business have sustained profitability thus far, many banks still need to see improved lending activity to shore up big expectations for the year ahead.

Thankfully, consumer credit is finally showing signs of coming back to life, rising by the most since 2017 in February. A jump in retail sales shows discretionary spending may also be back on the rise, signaling more potential for rising inflation and an even steeper yield curve ahead.

Related ETF & Stocks: SPDR S&P Bank ETF (KBE), JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), The Goldman Sachs Group, Inc. (GS), Morgan Stanley (MS)

This quarter’s earning season has been a breakout one for firms across the financial sector as earnings beats abound.

When all is reported, FactSet believes the S&P 500 financial sector’s profits will jump 78.7% in the first quarter, the second-highest profit growth expected from any sector in the quarter. These numbers come just a few weeks after Moody’s changed its outlook for US banks to ‘stable’ from ‘negative’. That was the first sector-wide upgrade since March 2020, the onset of the coronavirus outbreak.

Deposits and Reserve Releases Push up Profits

Emergency funds helped increase deposits at the four biggest US banks to $6.9 trillion last quarter, up 15% from a year earlier.

Along with that robust deposit growth, banks continued to unwind the billions of dollars they’d provisioned in 2020 for expected credit losses that never became too burdensome. In the previous quarter, Bloomberg notes that Bank of America, Citigroup, JP Morgan, and Wells Fargo reduced the amount they’d set aside by $12.7 billion. Those reductions, known as reserve releases, were booked against profits, depressing income for the first half of last year. Upon release, they can play a huge role in boosting profitability.

JPMorgan Chase, for its part, released $5.2 billion it had been reserving for potential loan losses back into its earnings, while deposits jumped 24% in the first quarter. The releases played a significant part in the record $14.3 billion net income the bank reported.

JPM has now released a total of $8.1 billion over the past two quarters, but still has roughly $25.5 billion left in its total reserves for losses….

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