Barclays Constructive On US Large-Cap Bank Stocks Ahead Of Earnings Reports

Bank earnings season is around the corner, and most banks are expected to continue their forecast-beating streak, according to Barclays.

The Analyst

Barclays analyst Jason Goldberg previewed big banks' Q4 earnings. 

The Thesis

Higher loan growth, higher net interest margins, the eliminations of the DIF surcharge and active stock buybacks are likely to more than offset weak fee income,  market-sensitive products and mortgage revenue, Goldberg said in a Thursday note.

Consensus EPS estimates have come down recently, the analyst said, with most market-sensitive names such as Goldman Sachs Group Inc GS, State Street Corp STT, Morgan Stanley MS, Citigroup Inc C, JPMorgan Chase & Co. JPM and Northern Trust Corporation NTRS seeing at least 2-percent reductions.

M&T Bank Corporation MTB, Comerica Incorporated CMA and Wells Fargo & Co WFC are the only banks to see upward adjustment in consensus estimates over the past 30 days, he said.

The increase may have been due to PaP gain, Goldberg said. 

Barclays is 5 cents below consensus for SunTrust Banks, Inc. STI, PNC Financial Services Group Inc PNC, Capital One Financial Corp. COF and Ally Financial Inc ALLY.

The analyst's estimates are the furthest below consensus for Goldman and Wells Fargo.

Relative to Q3, Barclays expects an increase in net interest income that's reflective of improved loan growth, wider net interest margins, varied fee income trends, controlled expenses, and higher loan loss provisions, with benign, asset-quality metrics and active share repurchases.

The reduction in the  DIF surcharge will bring down expenses for banks in Barclays' coverage universe by 1.2 percent in Q4, Goldberg said. 

On the flipside, the analyst said he expects increased marketing spending, technology investments, charges related to bank closures and losses from securities portfolio repositioning as factors impacting performance in the near-term.

This should help operating leverage in 2019, Goldberg said. 

Despite an anticipated slowdown in GDP, Barclays expects U.S. large-cap bank stocks to rise and outperform the S&P 500 Index, especially after the steep sell-off into the end of 2018.

" ... We expect our coverage to benefit from continued earnings/book value growth, active capital management, ‘regulatory finalization' and an increasing benefit from leveraging technology/economies of scale," the analyst said. 

The Price Action

The Financial Select Sector SPDR Fund XLF was rising 0.14 percent at $24.48 at the time of publication Friday, while the iShares Dow Jones US Financial IYF was near-flat at $109.90. 

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