Morgan Stanley's 3 Bullish Themes For Large-Cap Banks

In a new report, Morgan Stanley analyst Betsy Graseck discusses the firm’s bullish outlook for large-cap bank stocks. While Morgan Stanley’s forecast for Q2 earnings season is mostly in-line with consensus, Graseck believes that the guidance issued by many big-name banks will soon start to significantly improve.

Q2 Preview

According to the report, bank shareholders should keep expectations low heading into Q2 earnings, but the forward-looking nature of the stock market could begin to boost bank stocks well ahead of fundamental improvements to the banking environment.

“Higher rates, a strong spring selling season, and record M&A volumes all position banks well for 2H15 and beyond,” Graseck explains.

Key Earnings Themes To Watch

Graseck lists three major themes that Morgan Stanley anticipates will dominate big-bank earnings season:

• The firm expects improving guidance when it comes to net interest margins (NIMs), and earnings per share (EPS) in response to rising 10-year treasury yields.
• Morgan Stanley sees strong Q2 mortgage numbers from big banks and is predicting a 19 percent quarter-over-quarter increase in mortgage origination revenues.
• Morgan Stanley sees booming M&A-related revenues resulting from the strongest M&A environment since the Financial Crisis.

Stock Picks

The report names top stock picks relating to each of the three emerging themes in banking.

Morgan Stanley names Overweight-rated Bank of America Corp BAC and Regions Financial Corp RF as its top rate-sensitive picks.

When it comes to the mortgage business, Equal-weight-rated Wells Fargo & Co WFC and SunTrust Banks, Inc. STI are the biggest names to own.

Traders looking for exposure to the M&A environment should look to Overweight-rated Moelis & Co MC or Equal-weight-rated Goldman Sachs Group Inc GS.

Disclosure: the author owns shares of Bank of America and Wells Fargo.