After reviewing 28 banks’ recent performance, Deutsche Bank analysts have upgraded Goldman Sachs Group Inc (NYSE:GS) while downgrading U.S. Bancorp (NYSE:USB).
Matt O’Connor and team at Deutsche Bank AG (NYSE:DB) (ETR:DBK) observe that of the 28 banks on their radar, 14 could beat consensus estimates, while 2 were in-line and 12 missed the estimates.
Upgrades Goldman Sachs to Buy
Deutsche analysts feel during the fourth quarter, Goldman Sachs Group Inc (NYSE:GS) will benefit from relative higher performance from both FICC and equity trading, as well as deriving benefits from continued comp flexibility and good completed M & A. With Goldman’s stock trading at just a modest premium to stated book, Deutsche analysts anticipate decent valuation support. Accordingly, the analysts have revised Goldman’s 12 month target at $181.
However, Matt O’Connor the Deutsche Bank AG (NYSE:DB) (ETR:DBK) team have downgraded U.S. Bancorp (NYSE:USB) from Buy to Hold as they feel there was over $100 million of MSR gains that weren’t disclosed in the bank’s third quarter results. With the outlook looking a bit more sluggish than the analysts’ original estimates, Deutsche analysts have reduced their 2014/2015 on U.S. Bancorp by 3/5%.
Capital markets revenues to pick up before loan growth
Deutsche analysts anticipate that capital markets revenues will pick up before acceleration of loan growth and short term interest rates rise. Interestingly, the analysts don’t anticipate short term interest would rise before the 2016 U.S. Presidential election.
Matt O’Connor and team at Deutsche Bank AG (NYSE:DB) (ETR:DBK) feel EPS misses matter more than in the past, with stocks declining by -1.2% on average for those 12 banks who missed the estimates.
The following table depicts Deutsche Bank analysts’ summary of EPS changes post the third quarter earnings:
RBC recommend Buy on top banking stocks
RBC global equity team considers the top 20 banks’ recent performance as good despite facing a challenging environment.
Gerard Cassidy and team at RBC feel the third quarter 2013 results for the largest 20 U.S. banks were notable as they were able to combat the depressed revenue environment by posting continued credit improvement and effective expense management.
RBC analysts feel the top banks were able to achieve 5.3% earnings growth despite median year-over-year earnings growth moderated from last quarter. They also commend the group for being able to reduce its non-performing assets to an average of 2.69% of total loans, thanks to better credit improvement.
However, RBC analysts note the median year-over-year revenues of the top 20 banks have declined 1.8% in 3Q13 against a growth of 2.6% in the previous quarter, thanks to weaker fee income trends witnessed particularly in mortgage banking. RBC analysts however note the admirable job done by several banks by managing the bottom line impact well.
US banks maintaining operating expenses
Gerard Cassidy and team at RBC also feel the top 20 banks have paid special attention to managing their operating expenses through expense-reduction measures.
RBC analysts expect the third quarter trends such as containing expense growth, lower credit costs and stronger capital through stronger growth in fee revenue would be replicated in the fourth quarter of 2013.
Enthused by their view of valuations returning to normal over the next two years, RBC analysts recommend that investors buy banking stocks, as they feel some of the top 20 banks could potentially generate over 50% returns.