Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) named Fifth Third Bancorp (NASDAQ:FITB) and Morgan Stanley (NYSE:MS) as its top banks among US banks, while loan growth remains sluggish and net-interest margins stay low for the entire sector.
Medium and long term interest rates were up nearly 100 bp for Q2, but traders were disappointed that this didn’t translate into stronger net-interest margins (NIM). Even if the higher rates are beneficial in the long-run, the impact is likely to be small because large banks are shying away from the long dated assets that already make up a large portion of their deposits. Meanwhile, tangible book was down this quarter at half the banks covered in the Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) report.
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Deutsche Bank reports loan growth needs to pick up
Loans were nearly flat, up 0.5 percent from last quarter. While this was in line with most expectations, it was only because those expectations have been set so low. “From here, loan growth needs to pick up to the mid/high single digits for most large banks (and to double digits for asset sensitive banks) to grow revenues and meet 2014 estimates in our view unless short term rates rise which seems unlikely,” wrote Deutsche Bank research analyst Matt O’Connor.
Fifth Third Bank and Morgan Stanley stand out among US banks.
Fifth Third Bancorp (NASDAQ:FITB) is an attractive option in this market because it is seeing growth in non-interest fee categories, where its rivals are mostly stalled, and because its mix of assets is better positioned to take advantage of rising long-term rates, says the report. Deutsche Bank’s 2014 target for Fifth Third Bancorp (NASDAQ:FITB) is about 2 percent higher than consensus. Their 2015 target is in line with consensus, but only because Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) thinks the 2015 consensus is too high for the financial sector as a whole.
Morgan Stanley (NYSE:MS) beat expectations with its Q2 earnings, and impressed investors with an unexpected $500 million share repurchase authorization, showing confidence from both management and regulators. Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB)’s assessment of Morgan Stanley (NYSE:MS) is in line with consensus, but with strong EPS growth estimated at 23 percent in 2014 and 15 percent in 2015, with plenty of upside if rates go up unexpectedly.
Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) is also positive on Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), PNC Financial Services Group Inc (NYSE:PNC), and U.S. Bancorp (NYSE:USB).