Management succeeded in lowering guidance
Goldman analysts led by Richard Ramsden believe that large cap banks management teams successfully lowered investors’ expectations for second quarter earnings. Banks’ earnings exceeded consensus and management’s conservative projections as activity picked up in June. Goldman believes that bank stocks could gain more during the second half of this year as they remain well positioned to meet market expectations. Large cap banks are reasonably priced with a 10x price/earnings (P/E) ratio relative to regional banks that are trading at a 12x P/E.
Large Cap Banks: Estimates revised upward
Goldman analysts increased their earnings estimates by 1% for 2015 and 2016 after reporting concluded for the latest quarter. They see growth in merger and acquisitions, wealth management and lending revenues. Ramsden and his team do not see trading revenues from equities or fixed income as a significant earning driver on the near term but they believe that trading could benefit from higher market volatility over the longer term. Morgan Stanley (NYSE:MS) has more exposure to wealth management and investment banking – which are growing revenue drivers – and depends less on trading revenues. Goldman analysts signaled that Morgan Stanley has more upside potential relative to its peers for the last half of this year as they increased the firm’s estimates by 4%.
Higher loan provisions for 2015 pose risks
Ramsden conceded that meeting 2015 consensus expectations could be harder for large cap banks as loans grow and higher loan loss provisions are put in place. Wells Fargo & Co (NYSE:WFC) and PNC Financial Services Group Inc (NYSE:PNC), in Goldman’s view, have a higher risk of earnings falling short of consensus expectations next year. Both PNC and WFC may increase their loan provisions by a larger percentage relative to their peers. Citigroup Inc (NYSE:C), U.S. Bancorp (NYSE: USB) and JPMorgan Chase & Co. (NYSE:JPM) will likely post a smaller loan provision increase next year relative to their peers and present lower downside surprise risk, according to Goldman.