Now that most large-cap banks have made it through earnings season, analysts at Morgan Stanley took a look at where the dust settled. Overall, analysts expect the focus of the big banks will continue to be cost-cutting until a more favorable interest rate environment eventually comes along.
Analysts identified four themes that were common among the large-cap banks in Q1:
1. Falling NIMs
According to the report, net interest margins (NIMs) at the large-cap banks were down 5bps in Q1. Analysts predict a further decline of 2bps throughout the rest of the year, although there is potential for NIM upside if the Fed were to raise interest rates sooner than expected.
2. Cost Cutting
Once it became apparent that a rate hike wasn’t coming as soon as previously expected, banks shifted their focus to reducing costs. Expense ratios in Q1 fell 1.5 percent quarter-over-quarter to 62.5 percent. Analysts predict that expense ratios will fall as low as 61.4 percent by the end of 2015 compared to a 63.4 percent ratio in 2014.
3. Strong Equities Trading
Equities trading in Q1 surprised to the upside, jumping 21 percent year-over-year versus expectations of a 2 percent drop. For now, analysts are counting the successes of Q1 trading as more of an outlier than an indication of what to expect for the rest of the year.
4. Benign Credit
Median NCOs fell 4 bps quarter-over-quarter. Analysts believe that falling consumer debt levels will continue to drive several more years of low credit losses for banks.
Despite the tough interest rate environment, Morgan Stanley analysts are bullish on several large-cap banks. The report names Bank of America Corp BAC 0.31%, Citigroup Inc C 0.82%, JPMorgan Chase & Co. JPM 0.53% and Synchrony Financial SYF 1.33% as its top stock picks in the space.
Read this article and all my other articles for free on Benzinga by clicking here
Want to learn more about the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!