At first glance, the second quarter of fiscal 2020-21 represents a blinding quarter for US bank earnings.

Profits are up and analyst forecasts are beaten. Witness the booming investment banking revenues at lenders such as JPMorgan Chase and Goldman Sachs. It all serves to provide some cheer for Wall Street.

Van Hesser, chief strategist and Nathan Powell, Managing Director and Product Lead for KBRA Financial Intelligence discuss US Q2 earnings with editor Douglas Blakey

Add in a faster than forecast recovery for the US economy with a lower than forecast unemployment rate of about 5% provides one major boost this quarter. The banks can release by the billion provisions prudently set aside for Covid-related loan losses that did not come to pass.

This time last year for example, Chase set aside almost $9bn in expectation that loans and mortgages would default amid the pandemic.

US banks earnings: favourable capital markets

But jump forward just 12 months. Bank of America releases $2.2bn in reserves while at Citi the figure is $2.4bn and closer to $3bn at Chase.

So, the reasonable conclusion would be that it is a great time to be bank in the US. And certainly, the US market represents a favourable environment in the capital markets.

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There is however reasons for caution: indeed as Van Hesser, chief strategist with the ratings agency Kroll Bond Rating Agency tells RBI, the second quarter US bank earnings come with notable caveats.

Hesser says: “It is remarkable to think we have gone through the sharpest but shortest recession in history. It is extraordinary how low the loan the losses are.

“It is such a swing factor and these loan losses are at extraordinary low levels. Everything else is almost secondary given what we have come through.”

We are at an inflexion point: Van Hesser

“We are at an inflexion point and we are going to see the economy correct. Read GDP growth of 9% in the second quarter this year will fall to 2.3% by the fourth quarter of 2022.

“The great deceleration is about to take place. Bankers would love to see businesses and consumers borrow more. But consumers do not have to borrow much. Concern about where loan growth will occur in the future is weighing on banker and investor sentiment,” Hesser stresses.