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Fitch Ratings has revised its Sector Outlook for US banks to Stable from Negative for 2021 reflecting expected improvements in economic conditions in 2021.

While downside risks remain in the form of second or even third wave of infections and renewed lockdown measures, optimism around vaccines for COVID-19 could make 2021 a tale of two halves for US Banks.

While our Sector Outlook for 2021 is Stable, Fitch’s Rating Outlook remains Negative, with approximately 60% of U.S. bank ratings carrying a Negative Outlook. Bank fundamentals have largely held up better than our baseline and downside scenarios, suggesting widespread downgrades are less likely. Capital ratios, in particular, have held up remarkably well since the pandemic on capital preservation measures and a general reduction in risk-weighted assets.

However, Fitch remains cautious until vaccines are widely distributed and economic stabilization is expected to be fully sustained. While banks have largely reserved for potential problem credits under the current expected credit loss (CECL) standard, it remains to be seen what the impact on credit quality will be if and when fiscal stimulus is tapered.

Moreover, U.S. banks will continue to contend with a lower for longer interest rate environment and lower loan demand, which will pressure top line revenues, especially in the first half of 2021. In the latter half, if the vaccine’s distribution is effective and to scale, we believe a general pick up in economic activity could spur on modest loan growth and be a positive for revenues and earnings performance.’

Market implications

US banks, a long-time underdog on Wall Street, are gaining again on Tuesday after showing dramatic gains in the previous day’s session

The KRE index has been on fire today, up some 2% at the time of writing. KRE tracks an equal-weighted index that covers US regional banks exclusively.

Meanwhile, financials regained its place as the largest sector in the S&P SmallCap 600 Index at 17.7%, around where it was as the end of 2019.