The 2017 US Bank Outlook: Goldman, JP Morgan, Huntington, Wells Fargo Are Top Picks

Amid an expected uptick in GDP and rise in interest rates, Deutsche Bank says Goldman Sachs Group Inc GS, JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC and Huntington Bancshares Incorporated HBAN are its top stock picks for 2017 in the banking sector.

Deutsche's US economist Joe LaVorgna raised his real GDP growth forecasts to 3 percent in 2017 and 3.3 percent in 2018. However, based on the latest FOMC meeting, the Fed is closer to 2 percent for both 2017/2018.

Though higher rates will benefit bank NIMs and EPS, higher long-term rates may hit tangible book value/capital and may reduce buybacks.

Lead analyst Matt O-Connor noted that though leverage to rising rates may already be priced in, there may still be upside to capital market businesses from a stronger economy and a less onerous regulatory environment.

Within the Market Sensitive group, the analyst said Goldman continues to be his top pick followed by JPMorgan. Within Large Regionals, the analyst prefers Huntington and Wells Fargo.

For the fourth quarter, the analyst is expecting mixed results, with bank NII/NIMs should benefit from higher interest rates this quarter, while loan growth will be sluggish. In capital markets, O-Connor projects FICC results to be strong, equity trading to be okay, and investment banking fees to be sluggish.

Following are Deutsche Bank’s brief overview of its four bank stock picks:

Goldman Sachs

O-Connor is bullish on Goldman Sachs as it believes the company’s capital markets business should benefit from stronger GDP and softened regulation. In addition, the results should be aided by the recent rollout of a consumer lending platform and operating leverage.

The analyst expects fourth quarter earnings of $4.50, below FactSet consensus of $4.68.

JPMorgan

The analyst’s positive thesis on JPMorgan stems from strong EPS from better economy, higher rates & better capital market revenues; good defensive characteristics during periods of volatility and attractive valuation. For the fourth quarter, O-Connor projects EPS of $1.41, $0.04 above Street.

Wells Fargo

Connor said the most of the bad news around sales tactics are priced in. The analyst estimate the issue could reduce pre-tax earnings by $1 billion and trim share buybacks by $2 billion. O-Connor estimates fourth quarter EPS of $0.99, a penny below consensus estimate.

Huntington

O-Connor says HBAN still trades at a large discount to peers due to concerns surrounding its indirect consumer auto book and lingering concerns related to the recently closed acquisition. The analyst believes deal concerns should be alleviated over the next 1-2 quarters as cost saves begin to be realized.

The analyst noted that devaluation is overdone and projects fourth quarter EPS of $0.21, above Street view a penny.

All the above stocks are Buy-rated at Deutsche Bank.