Banks spent much of 2023 bolstering their balance sheets for a recession that never came. If the economy keeps holding up, that could turn into a win for investors in the year ahead. Loan loss reserves have perked back up in recent quarters and are at roughly 1.75% of loans outstanding, according to MRB Partners. That's above a pre-Covid average level of 1.20-1.25%.
"In our view the market's initial focus on the lack of upside surprises in was shortsighted and missed the more important takeaway, which is that the outlook for overall bank earnings is one of ongoing resiliency," Ruscitti added. Lauren Goodwin, chief market strategist and economist at New York Life Investments, agreed that a potential slowing or reversal of loan loss reserves would be positive for bank earnings but said she is cautious on bank profitability more broadly.