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Your Big Bank Q2 Earnings Preview And Top Picks

NTRS, C.BAC, BK, V.ZZE.H, GS, JPM, MS, RJF, STT, WFC | July 9, 2017

Looking at the financials industry group, Buckingham Research Group analyst James Mitchell sees his long-term positives starting to line up and has raised several of his price targets.

A Closer Look At Mitchell’s Ratings

Bank of America Corp (NYSE: BAC): Maintains Buy rating, raised price target from $27 to $30.
Bank of New York Mellon Corp (NYSE: BK): Maintains Neutral rating, raised price target from $52 to $57.
Citigroup Inc (NYSE: C): Maintains Buy rating, raised price target from $70 to $81.
Goldman Sachs Group Inc (NYSE: GS): Maintains Neutral rating, raised price target from $235 to $243.
JPMorgan Chase & Co. (NYSE: JPM): Maintains Neutral rating, raised price target from $94 to $100.
Morgan Stanley (NYSE: MS): Maintains Buy rating, raised price target from $51 to $54.
Northern Trust Corporation (NASDAQ: NTRS): Maintains Neutral rating, raised price target from $93 to $103.
Raymond James Financial, Inc. (NYSE: RJF): Maintains Buy rating, raised price target from $88 to $94.
State Street Corp (NYSE: STT): Maintains Buy rating, raised price target from $94 to $107.
Wells Fargo & Co (NYSE: WFC): Maintains Neutral rating, raised price target from $60 to $62.

Top Picks: Bank Of America Corp, Citigroup, Morgan Stanley and State Street Corp.

Key Takeaways

Mitchell highlighted weak FICC trading and fair internet-banking numbers: “We are forecasting industry FICC trading revenue to drop nearly 20% YoY, below our prior forecast of -6%. Our estimate for equities trading revenue (+1% YoY) is unchanged, while we bumped up our i-banking fee forecast to +4% YoY (-5% QoQ) from -2% YoY previously.” Mitchell also pointed out how loan growth is still slow, but stable.

The March rate hike should “more than offset the modest flattening of the curve (70% of rate sensitivity tied to ST rates) and push NIMs higher,” Mitchell noted.

Regarding estimates: “We increased our 1-year targets by a median of 8%. Our work shows that the ‘big 5’ global banks have averaged a 72% market multiple over the past 20 years, which translates into a target P/E of 13x NTM EPS. We used a similar market multiple analysis for the trust banks.”

Why Is Mitchell Bearish On Goldman Sachs?

Mitchell's estimates are substantially lower than Q2 estimates for Goldman Sachs as he does not “view weak 1Q17 results as temporary, but see[s] it reflecting greater exposure to higher margin OTC derivative trading with hedge fund counterparties.”

“With poor performance and outflows at hedge funds, we see limited desire to put on illiquid and leveraged positions, which is hurting FICC revenue at GS disproportionately.” This would cause further negative EPS revisions.

Why Should You Invest In Citigroup?

“We are a modestly above consensus, with upside potential from strong i-banking trends and a weakening dollar,” Mitchell said. "A significant increase in share buyback activity will also kick in following earnings results. Lastly, we would expect investors to buy in front of its first investor day since the crisis in late July."

Industry Outlook

It is evident Mitchell sees a lot to like for banking going forward as he upped all of his price targets by a median of 8 percent. Specifically, he pointed out improving global growth, increases in capital return in the latest CCAR, an increasing probability of deregulation and the potential for a corporate tax reform.

One Of The Street's Top Bank Analyst Offers His Hottest Pick