Wall Street’s worst fears about the fallout from COVID-19 are receding.

Three of the biggest U.S. lenders -- JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. -- cut their combined reserves for losses on loans by more than US$5 billion, helping fourth-quarter profit top estimates even as they faced headwinds from low interest rates. While posting results Friday, executives expressed guarded optimism about fiscal stimulus and rising vaccinations during a pandemic in which delinquencies have remained low. Still, the banks warned the economy isn’t out of the woods yet.

Six of the largest U.S. banks urgently set aside more than US$35 billion to cover loan losses in the first half of 2020 with the message that they simply had no idea what to expect. Now, banking chiefs are pointing to prospects for a rebound this year. Unprecedented action from the Federal Reserve and lawmakers have allayed the worst-case scenarios.

“We’ve seen further improvement on both GDP and unemployment,” Citigroup Chief Financial Officer Mark Mason told reporters on a conference call, referring to gross domestic product. There are a lot of favorable indicators that “make for a more positive outlook in 2020 and hopefully a continued, stable recovery,” he said. Beyond vaccines, he pointed to more clarity on the next U.S. presidential administration and prospects for additional stimulus.

Still, Wells Fargo and Citigroup led bank stocks lower -- each falling more than 6 per cent at noon in New York -- as investors focused on weaknesses specific to their businesses. At Wells Fargo, costs declined less than analysts estimated as the bank spent money on restructuring in the wake of scandals. Citigroup’s massive bond-trading division generated less revenue than expected in the final months of 2020. JPMorgan slipped 2 per cent.

Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley are set to report quarterly results next week.

Consumer divisions at the biggest U.S. banks came under particular pressure from the COVID-19 outbreak that shut businesses and put millions out of work last year. Even so, loan books have since fared surprisingly well, as a dreaded onslaught of defaults never rolled through. After trading divisions benefited from a bumper year, banks even won approval last month from the Federal Reserve to restart share buybacks.

As JPMorgan briefed analysts, Erika Najarian from Bank of America asked whether the government’s support has been strong enough to carry credit-card borrowers, for example, through the pandemic.

“It does feel like at this point, in this crisis, that the bridge has been strong enough -- the question that still remains is, is the bridge long enough,” CFO Jennifer Piepszak said on the conference call. “But we have to get through the next three to six months.”

JPMorgan took down reserves by US$2.9 billion, helping fourth-quarter profit surge to a record US$12.1 billion. Citigroup released US$1.5 billion from its stockpile, resulting in a US$4.63 billion profit that was down less than analysts projected. Wells Fargo released about US$760 million because of lower net charge-offs. That lifted net income above estimates to US$2.99 billion.

A large portion of the releases came from divisions catering to corporations.

Still, executives cautioned that there’s plenty of uncertainty ahead and a likelihood that defaults will rise later in the year. JPMorgan Chief Executive Officer Jamie Dimon said the significance of reserve releases shouldn’t be overstated or considered recurring income.

“We don’t consider it profit -- it’s ink on paper,” Dimon said.

--With assistance from Michael J. Moore, Jenny Surane, Michelle F. Davis and Hannah Levitt.