More generous dividends are expected to be a key theme in the forthcoming quarterly reporting season for US banks, which starts on 14 July.

The sector underperformed during the pandemic due to fears of increasing loan losses. Banks took huge provisions in anticipation of a severe downturn. However, the jump in bad debts was a fraction of those witnessed during the great financial crisis.

Lenders have been releasing some of these bad debt provisions and beating earnings expectations. Balance sheets also remain strong.

US banks recently cleared their annual stress test exercise which looked to see if they could cope with a severe economic downturn. Success in the test has already seen several banks declare an intention to pay higher dividends.

For example, Goldman Sachs (GS:NYSE) said it would hike its dividend by 25%. However, Citigroup (C:NYSE) announced that it wouldn’t raise near-term dividends and investors will be eager to find out why at its next update on 15 July.

US banks today have significantly more capital, greater liquidity, generate strong returns, and have a more cautious risk appetite.

The forthcoming results may demonstrate the sector is entering a virtuous cycle. As bond yield and interest rate expectations go up, earnings expectations for the sector will increase. However, bank share prices in general have been weak this year due to fears about recession.

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