US banks are on course to report a 19% annual pullback in per-share earnings for the second quarter due to weakness in capital markets and higher loan loss provisions, but banking institutions focused on lending and core deposits should fare better than others, RBC Capital Markets said Tuesday
The brokerage projects a 47% annual slump in investment banking revenue, driven by declines across all categories, particularly pronounced in equities. Markets revenue is estimated to rise 17%, buoyed by fixed income, currency and commodities, RBC analyst Gerard Cassidy said in a note.
Fee revenues in wealth management and residential mortgage businesses will also likely be lower, though net interest income is seen rising 14% year on year amid rising interest rates, according to the firm.
Loan loss provisions are expected to be higher to reflect loan growth and the impact of the current expected credit losses accounting methodology that took effect at the start of 2020, Cassidy said. Reserve releases booked last year are expected to be missing from the most recent quarter that ended June 30.
"Double-digit revenue growth driven by (net interest income) is expected to more than offset higher levels of loan loss provisions which should enable the banks stocks to out perform the general market similar to the 2000-2002 period," Cassidy wrote.
RBC said "investors should be overweight the bank group" and own Bank of America (BAC), Fifth Third Bancorp (FITB), KeyCorp (KEY), M&T Bank (MTB), PNC Financial Services (PNC), Regions Financial (RF), and Truist Financial (TFC).
"Today's valuation levels make the group attractive both on an absolute and relative basis," Cassidy said. "Investors who believe that the economy, however, will not enter a deep recession should look to own banks stocks, in our view."
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