Bank Cheat Sheet: How Much EPS Downside Is The Market Pricing In?

In a new report, Deutsche Bank analyst Matt O’Connor discussed what the recent selloff in bank stocks means in terms of market expectations for 2016 bank earnings. O’Connor believes significant earnings downside has already been priced into bank stocks.

Deutsche Bank’s analysis indicates that the market is now expecting 10 percent downside to big U.S. bank earnings this year. O’Connor noted that, if macroeconomic conditions improve in the short-term, the bank selloff may prove to be an overzealous knee-jerk reaction. However, if the economy continues to deteriorate, he sees plenty more room to the downside for bank earnings.

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“We est [estimate] a modest C&I cycle could hit EPS by 10 percent and a haircutting of trading, ibanking and wealth/asset mgmt. would reduce mkt sens banks by another 7-10 percent,” O’Connor explained. He added that lower-than-expected net interest income represents up to 5.0 percent additional earnings downside.

O’Connor said Deutsche Bank sees real risk of a U.S. recession, but anticipates any recession would likely be a mild one.

A Few Names

Deutsche Bank maintains Buy ratings on the following market-sensitive and large regional banks:

• Bank of America Corp BAC
• JPMorgan Chase & Co. JPM
• Citizens Financial Group Inc CFG
• M&T Bank Corporation MTB
• PNC Financial Services Group Inc PNC
• SunTrust Banks, Inc. STI
• U.S. Bancorp USB
• Wells Fargo & Co WFC

Disclosure: The author owns shares of Bank of America.