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Previewing Big Bank's Q2 Earnings: Wells Fargo Is Deutsche Bank's Favorite Non-Macro Dependent Stock

FITB, HBAN, C.BAC, V.ZZE.H, FHN, GS, JPM, KEY, MS, RF, WFC, CFG | July 1, 2017

Deutsche Bank in a note Friday previewed second-quarter earnings of big banks, highlighting Wells Fargo & Co (NYSE: WFC) as its favorite non-macro dependent stock.

Analyst Matt O'Connor named Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS) and JPMorgan Chase & Co. (NYSE: JPM) as his top picks.

Trading To Hurt 2Q Results

Deutsche Bank expects a mere 5-percent earnings per share for the second quarter, given drags from trading, mortgage, credit costs and modest expense growth. The firm said it expects most of the market sensitive banks/brokers, which pre-announced in late May/early June weaker-than-expected trading, to miss estimates in the second quarter.

The firm sees earnings of these banks to decline 6 percent year over year, on average, although expecting large regional banks to do better, with an estimated 9-percent earnings per share growth. The positive influence due to solid net interest margin expansion, according to the firm, will be offset by weak loan growth, sluggish mortgage and a grind higher in credit costs.

The firm feels trading would determine whether the estimates for the second half of 2017 and 2018 are achievable.

Likely Beats/Misses

Deutsche Bank said it expects modest beats, defined as 3 percent or more upside in earnings per share versus the consensus, at Citizens Financial Group Inc (NYSE: CFG), Huntington Bancshares Incorporated (NASDAQ: HBAN), KeyCorp (NYSE: KEY) and Regions Financial Corp (NYSE: RF).

The firm expects Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C), Goldman Sachs, Morgan Stanley, First Horizon National Corp (NYSE: FHN) and Fifth Third Bancorp (NASDAQ: FITB) to report below-consensus bottom line results.

Prognostication For Key Q2 Metrics

Strong net interest income and net interest margin expected, with the former expected to grow 7 percent and the latter by 13 basis points.
Sluggish loan growth, with an estimated 3-percent growth.
Sluggish capital market revenues, with a 10-percent drop estimated in FICC and flat investment banking fees.
Seasonal pick up in mortgage purchases likely to have been tempered by soft refinancing.
Solid credit trends but higher credit costs.

Capital Markets Banks: The Winners

Deutsche Bank believes capital markets banks are the best positioned for changes in monetary and regulatory policy. The firm sees money center banks as big Comprehensive Capital Analysis and Review, or CCAR, winners this year.

"From here, any softening of leverage capital ratios, operational RWAs, CCAR, Volcker, collateral requirements for certain derivatives, etc. would bode well for these banks (and the brokers)," the firm said.

Additionally, the firm feels monetary policy normalization by the Fed, including the run-off of the Fed's balance sheet, could create additional client demand and trading opportunities.

CCAR: Positive For Banks

Deutsche Bank is of the view the CCAR results are a positive for banks, as buybacks and dividends beat expectations. The firm also thinks the results are signaling easing of regulatory pressures.

The firm believes Wells Fargo is the biggest winner, while it also considers Citigroup, Bank of America and JPMorgan as winners.