A new report form Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) takes a look at one of the worst environments that major U.S. banks might have to deal with in the coming year, and in reality are dealing with right now. A report from analyst Matt O’Connor takes a look at a situation where both interest rates and rates of loan growth stay at lows for an extended period of time.

O’Connor then subjects the world’s biggest banks to tests based on this environment in order to figure out which institutions will benefit if the Federal Reserve’s monetary policy is both continuous and ineffective. The first thing to remember, however, is that this is the exact situation the banks are facing right now.

Low loan growth continues

Low interest rates are easily recognized in today’s economy, but the low loan growth may surprise you given how cheap money is in the United States. The below chart shows off year on year loan growth from the beginning of 2009 through to the last measured quarter. The metric doesn’t exactly look good for banks in the United States.


Some banks are stronger than others, however, and the job of this report is to identify them. O’Connor picks out the four best positioned to deal with the effects of the problem. Those are Wells Fargo & Co (NYSE:WFC), UBS AG (NYSE:UBS), PNC Financial Services Group Inc (NYSE:PNC) and Fifth Third Bancorp (NASDAQ:FITB).

The factors that make banks like Wells Fargo & Co (NYSE:WFC) better positioned to deal with the climate include greater concentration of fee revenue, expense opportunities, credit leverage, flexibility to add securities, and a valuation below that of the average financial. These banks are, in the view of O’Connor, the most likely to be able to deal with less money than hoped from loans while maintaining or growing value.

Surprisingly, the report names JPMorgan Chase & Co (NYSE:JPM) as one of its top picks going forward, but not because of its ability to deal with low loan growth. The bank’s value is being dragged by regulators and legal uncertainties. That makes it one of the cheaper buys out there, assuming it returns to normal business in the next six to twelve months.

Key trends in Q3 earnings

The report takes a look at the key trends to watch for when the financials come forward with their earnings. NIMs, Capital markets, mortgages, credit metrics, and capital levels will be the most important figures in the earnings reports according to O’Connor. There are expectations weighing on each of them.

NIMs, or Net Interest Margins, are expected to decline along with Net interest income in the low interest low loan growth world. Mortgages and capital markets income is expected to decline, trends in credit markets are expected to improve across the board, and capital levels are expected to continue to have increased through the quarter.