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6 Major Banks Set to Trump Q2 Earnings Amid Tough Backdrop

Swayta Shah

The earnings season is knocking at the door and investors are keeping a close watch on the performance of major banks.

After decent first-quarter results, major banks’ performance is expected to be dismal this time. The primary reason is the disappointing lending scenario — mainly in the areas of commercial and industrial, and real estate — which persisted during the second quarter. This is expected to have an adverse impact on banks’ net interest income.

Further, the Federal Reserve’s accommodative policy stance, flattening of the yield curve and steadily rising deposit betas will likely hurt net interest margin (one of the key metrics for gauging banks’ profitability) in the to-be-reported quarter.

Dismal capital markets performance is also a matter of concern. During the second quarter, several concerns, including some lingering from the prior quarters, like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown persisted. The central bank’s policy accommodation stance also led to ambiguity. All these factors weighed on investors’ mind and resulted in lower volatility. Thus, this will likely lead to decline in trading revenues.

The above-mentioned concerns also led to lower global M&A deal value and volume during the second quarter. Thus, growth in advisory fees is projected to be hampered. Nonetheless, underwriting business is anticipated to provide some support driven by rise in equity issuances, while debt issuances remained soft.

In a reversal in trend, mortgage banking performance is projected to improve on the back of lower mortgage rates, which drove the refinancing activities during the quarter. Seasonality aided mortgage banking revenues too. Additionally, wealth management operation will offer some support, given the decent equity markets performance.

Credit quality is also likely to remain strong, backed by conservative underwriting standards and improving economy, while delinquency rates related to consumer loans will likely rise.

Expense reduction, which has had helped banks remain profitable in the past, is unlikely to be a big support this earnings season. Increased investment in technology to strengthen digital offerings as well as starve off competition from fintech firms, and efforts to expand to new geographical regions are expected to result in a moderate rise in costs. But overall non-operating expenses are likely to be manageable.

In the S&P 500 universe, the Zacks Finance sector’s total earnings, of which major banks account for nearly 45%, are projected to increase 2.7% year over year in the quarter to be reported. This is in line with the growth recorded in the prior quarter.

(For detailed look at the earnings outlook for this industry and others, please read our Earnings Outlook article.)

Picking the Winning Stocks

While all major banks may not report impressive second-quarter results, there are a few that are expected to outshine their peers and beat estimates. So, this is the right time to add those to your portfolio.

Selecting stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Major Banks Set for Earnings Beat

Here are six major regional bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:

The Earnings ESP for Wells Fargo WFC is +0.87% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 16.

PNC Financial PNC is scheduled to release results on Jul 17. The company has an Earnings ESP of +1.59% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Comerica CMA is +0.66% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Jul 17.

BB&T BBT is scheduled to release results on Jul 18. It has an Earnings ESP of +0.74% and a Zacks Rank #3.

M&T Bank MTB is slated to release results on Jul 18. The company has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

SunTrust Banks STI has an Earnings ESP of +0.93%, and at present carries a Zacks Rank of 3. It is slated to report quarterly figures on Jul 18.

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