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CS Slashes Q1 Estimates For JPM, Citi, WFC, Other Large Cap Banks

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With first quarter earnings coming up, Credit Suisse Group AG (ADR) (NYSE:CS) is revisiting its EPS estimates for U.S. large cap banks, and it sees a host of problems that will put pressure on margins and dampen growth. Forward guidance will be especially important this quarter as management explains how it intends to drive performance when revenues are low.

“We expect 1Q to continue to reflect the challenges seen last quarter including some NIM pressure, slow loan growth and a decline in mortgage banking revenues,” write Credit Suisse Group AG (ADR) (NYSE:CS) analysts Moshe Orenbuch and Jill Glaser Shea in an April 7 report.

Even though large cap banks have put a lot of emphasis on cost control, higher than expected litigation expenses could undo their efforts for last quarter. Slower mortgage originations are offset by stronger corporate and industry loans, while consumer loan growth is falling but still positive. Credit card balances have fallen about 1% year on year, and core trading revenues could fall by as much as 20% at some of the more capital sensitive large cap banks, pulling down revenues.

us total loan growth 0414 large cap banks

us consumer loan growth 0414 large cap banks

Large cap banks’ 2014 performance will depend on cost controls

The good news is that credit quality is improving, and Credit Suisse Group AG (ADR) (NYSE:CS) predicts a 2% drop in non-performing assets and a 9% drop in net charge offs. Reserve bleed is slowing to a halt, likely reversing direction in 2015, and as the recent bout of stress tests showed capital ratios have improved nearly across the board. In light of this, even with NIM and revenues falling slightly, it should still be possible for large cap banks to perform well, and Orenbuch and Shea are looking for guidance that show management has a realistic plan to grow share prices.

“The ability to control costs will likely be a key differentiator in profitability over the coming year,” they write. “Beyond expense reductions in the mortgage business related to declining activity levels, we need to see more careful management of expenses in light of the revenue environment.”

Large cap banks’ PT reduced, but still rated Outperform

Orenbuch and Shea rate Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) as Outperform. They are reducing Citi estimates to $4.85 for 2014, $5.70 for 2015, and $6,00 for 2016 (3%, 3%, and 2% respectively) and dropping its price target to $62 from $65, while leaving JPMorgan estimates in place at $5.80 for 2014, $6.30 for 2015, and $6.75 for 2016, and keeping its price target at $70. They rate Bank of America Corp (NYSE:BAC), PNC Financial Services Group Inc (NYSE:PNC), U.S. Bancorp (NYSE:USB), and Wells Fargo & Co (NYSE:WFC) as Neutral, with 2014 EPS estimates of $1.05, $7.15, $3.15, and $4.00, respectively.

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