As earnings season kicks off for US banks, UBS analysts believe investors should look beyond the headline results for the second quarter and instead concentrate on the back half of the year.
“Outlook matters more than results,” the analysts wrote in a note, noting that no major fireworks are expected.
“We are 4% below consensus on the Global Systemically Important Banks (GSIBs), but we think that consensus is not fully updated from Q1, which may not have appreciated how slow April and H1 May would be,” they wrote.
However, sentiment has shifted since then. “We nevertheless found ourselves revising spring conference investment banking updates higher based on industry data, and expect management teams to be rather upbeat about H2 activity levels following a solid June, enough to keep shares going,” UBS wrote.
The Q2 results could mark an inflection point for large regional bank stock performance, a group that has lagged the GSIBs since Election Day, the analysts added.
“We are largely in-line with consensus for large regionals, and expect the outperformance here to be driven by loan growth momentum rather than net interest margin trends,” they wrote.
Top stocks to watch
Among names to watch is Citigroup Inc (NYSE:C). “We think investors are awaiting more specific H2 buyback commentary,” the analysts wrote, pointing to Citigroup’s existing authorization with plenty of room, a year-end CET1 capital target, and what we sense to be growing reticence to give quarterly buyback guides.
Wells Fargo & Co (NYSE:WFC, ETR:NWT) may be underestimated, UBS suggests. “Wells Fargo has been ironically abandoned by shorter-term investors after the asset cap lift. Expectations on net interest income seem low here, and just reiterating its range for 2025 might be enough to reignite interest,” the analysts wrote.
UBS also expects capital allocation questions to dominate the discussion for Goldman Sachs Group Inc (NYSE:GS, ETR:GOS). “We expect many questions on how Goldman Sachs plans to deploy its excess capital, given the 280 basis point reduction in preliminary stress capital buffer,” they wrote.
Among regional banks, UBS has a constructive view on KeyCorp (NYSE:KEY), which was recently upgraded to ‘Buy.’ They also see upside in PNC Financial Services Group Inc (NYSE:PNC), Fifth Third Bancorp (NASDAQ:FITB) and Citizens Financial Group Inc (NYSE:CFG), noting that net interest income momentum is underrated.
For Capital One Financial Corp (NYSE:COF), all eyes will be on the accounting treatment of its Discover acquisition. “We will get more clarity on purchase accounting, and we think a CET1 near 14% will be enough to keep momentum going, despite what we think will be a very noisy print,” the analysts wrote.
A potential surprise may come from Bank of America Corp (NYSE:BAC). “Bank of America is an underrated beneficiary of deregulation and an acceleration in second-half activity levels,” they wrote.
“That said, consensus appears a touch high on net interest income for the quarter at $14.9 billion (we think $14.7–14.8 billion is a more reasonable level, given a markets-heavy balance sheet in second quarter), and we expect improving investment banking and solid markets results to potentially push expenses a bit above the 2% to 3% growth range.”
The analysts noted that this earnings cycle appears less contentious than usual.
“We can’t seem to find many debate stocks this quarter,” they noted. “This quarter, we don’t really have strong feedback on a group of debate stocks, though arguably Bank of America comes the closest.”
They concluded: “We think the quarter will be mostly about H2 positive revisions than Q2 results themselves.”