Deutsche Bank Previews Q1 Earnings For Big Banks, Upgrades Morgan Stanley To Buy

In less than two weeks, big bank investors will get their first glimpse into the type of impact that the Federal Reserve’s 0.25 percent December interest rate hike had on bank bottom lines.

Deutsche Bank analyst Matt O’Connor has upgraded Morgan Stanley MS to Buy ahead of Q1 earnings season, but believes investors still need to be selective when choosing bank stocks.

After exploding out of the gate following Donald Trump’s election victory in November, bank stocks have cooled in recent weeks. Investors were anticipating the dawn of a new banking boom in a potential era of rising interest rates, financial deregulation and corporate tax cuts. However, President Trump’s missteps on his proposed healthcare bill now have investors concerned he may have difficulty implementing his other campaign promises as well.

“Recent weakness likely reflects lack of progress in Washington (in particular the postponement of healthcare reform) and more modest expectations around the administration’s ability to pass the rest of their agenda,” O’Connor explains.

Related Link: When Market Expectations Trump Reality: Regional Banks

In the past month, the Financial Select Sector SPDR Fund XLF is now down 3.7 percent.

Given the current climate, Deutsche Bank prefers market-sensitive banks to regional banks. O’Connor points out that large regional banks are currently trading at a 20 percent premium to historical levels.

Among market sensitive banks, the firm’s top stock picks include Morgan Stanley, Goldman Sachs Group Inc GS, and JPMorgan Chase & Co. JPM. Deutsche Bank named Buy-rated Wells Fargo & Co WFC as its top large regional bank stock pick.

Bank earnings season kicks off on April 13, when Wells Fargo, JPMorgan, Citigroup Inc C and PNC Financial Services Group Inc PNC are expected to report Q1 earnings.