With second quarter earnings coming up, Credit Suisse Group AG (ADR) (NYSE:CS) has adjusted its earnings estimates for US large cap banks slightly to account for the falling trade revenues that bank executives have been warning us about for the last few months. Credit Suisse has increased its price target for PNC Financial Services Group Inc (NYSE:PNC) from $90 to $95, U.S. Bancorp (NYSE:USB) from $44 to $46 and Wells Fargo & Co (NYSE:WFC) from $50 to $56, even though WFC is the only one whose EPS estimates have been revised up and all three are rated Neutral.

“We are fine-tuning our EPS estimates, generally reducing them for the capital markets sensitive banks (3-8% in 2014, and 1-2% in 2015 and beyond) as we now model a decline in trading profits for the full year 2014,” writes Credit Suisse analyst Moshe Orenbuch. “The environment remains challenging in terms of the revenue growth outlook.”

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Large cap banks: Cost controls will be a key differentiator for 2H14

The drop in trade volume and fee income has gotten enough attention that it’s already priced in, and Orenbuch expects 20% or higher year-on-year declines for market sensitive banks including Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM). But he also expects to see some rebound in June compared to March and April, so there could be some upside for shareholders if the price has overreacted to the negative headlines.

Mortgage related costs, including litigation, loan work-outs and foreclosures, should start to subside this year and we could get some clear guidance on that front, but Orenbuch still thinks that expense control is going to be one of the key differentiators between US large cap banks for the rest of the year because of the weak revenue environment. A string of large mortgage-related settlements this year also means that only Bank of America Corp (NYSE:BAC) has a large cloud hanging over its head, with a sizeable gap between the two sides’ settlement offers. Citigroup Inc. (NYSE:C) is also still in negotiations, but it originated about a tenth as many of the sub-prime mortgages as Bank of America so its final settlement is expected to be much smaller.

Loan growth is solid, but pressure on NIM continues

The good news is that loan growth is expected to accelerate, although falling net interest margins (NIM) continue to impact earnings. Orenbuch expects to see another 6bp average sequential decline in NIM, the same rate as in 1Q14, but net interest income should be slightly offset by the higher day count this quarter.

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Commercial real estate (CRE) loan balances are projected to grow 7.6% for 2Q14, compared to 5.1% during 2Q13, while commercial and industrial (C&I) loans are up 11% y/y compared to 8.1% y/y growth in 2Q13. But the large banks seem to be missing out on the biggest sources of loan growth.

“Looking into the details, it appears that the growth in C&I is disproportionately weighted towards smaller financial institutions, as well as foreign banks (perhaps due to more aggressive underwriting) than the large cap banks,” writes Orenbuch.

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Home equity lines continue to fall, and both consumer loan growth and credit card balances are flat quarter on quarter. Orenbuch also expects to see larger home equity loans going into amortization during 2014 – 2016, so it will be difficult for US large cap banks to grow total home equity loans over the next few years.

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