Bank Of America's 5 Bank Buys

Following the release of second quarter earnings by about 70 percent of U.S. banks in its coverage universe, Bank of America said it favors banks that have shown best-in-class execution irrespective of the rate scenario.

Accordingly, the firm favors JPMorgan Chase & Co. JPM, which it terms as clearly fitting the bill. The firm also believes Wells Fargo & Co. WFC and Sun Trust Banks, Inc. STI, where active manager ownership levels have come down, could execute.

Analyst Erika Najarian believes the markets are underestimating the ability of banks such as PNC Financial Services Group Inc. PNC and Citizens Financial Group, Inc. CFG to pursue efficiency improvement trends.

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Loan Growth

Analyzing Q2 results of banks, Bank of America noted that loan growth exceeded expectations. Reasoning that loan growth is vital for spread income stability, given that the average yield on the 10-year Treasury was just 174 basis points in the second quarter, the firm noted that estimates were lowered, as the 10-year Treasury yield fell further and rate hike bets are off the table.

Spread Revenue Weakness Prompts Estimate Reductions

Bank of America noted that spread revenue weakness is driving much of the decline in estimates for 2017. However, the firm feels that optimistic fees and provisioning forecasts and lower expense expectations could mitigate the impact of lower spread revenue.

BoA's Picks & Risks

• Citizens Financial Group: Delayed Fed rate hike pressuring revenue growth, higher losses on its consumer loan portfolio and quicker than expected credit normalization.
• JPMorgan: Prolonged period of low interest rates, further financial and regulatory scrutiny of the financial industry, enhanced regulatory and capital standards as a global SIFI, mortgage putback risk, material decline in investment banking, trading profitability and increased litigation risk
• SunTrust: Slower than expected rate increase
• PNC: longer low interest rate environment, implementation of a strict liquidity coverage ratio, further regulation on overdraft income that restricts bank profitability
• Wells Fargo: economic slowdown, final implementation of a strict liquidity coverage ratio, enhanced regulatory scrutiny and capital standards and any potential M&A that is unattractive to shareholders.