Looking for a Rally? Banks to Buy Ahead of Q2 Earnings

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Earnings season is underway, and the center of attention will shift to the banking sector during the week of July 15. Last Friday, banking giants JPMorgan Chase and Wells Fargo kicked off a series of bank earnings reports. Both companies beat consensus estimates by a respectable 5% margin. And on Monday, Citigroup followed the trend with a beat on earnings and revenue.

I believe the strong reports provided by these three banks will bode well for the rest of the banking sector. Here are three blue-chip banks that could outperform this week:

Consistent outperformer
Wednesday, July 17 before market open; EPS $0.76 / Revenue $5.00 billion

US Bancorp (NYSE: USB) maintains a conservative risk profile, but the company is an industry leader in numerous ways. The bank consistently posts an above-average return on equity. In the last 12 months, USB generated a 16.3% ROE, compared to an industry average of only 11.3%.

For the current quarter, investors will be looking to see if loan demand has slowed based on rising interest rates. A steepening yield curve will benefit the banking industry in numerous ways, but consumer appetite for borrowing may soften as mortgage rates begin to rise. Competitor Wells Fargo reported a year-over-year increase for Q2 2013, but demand slowed compared to Q1 2013.

Ahead of Wednesday’s earnings call, analysts at UBS reiterated their “buy” rating on US Bancorp and raised their price target to $41 from a previous $38. Australian-based Macquarie Group also initiated coverage of USB with an “outperform” rating on July 11.

In other news, US Bancorp celebrated its 150th anniversary in business by ringing the closing bell of the New York Stock Exchange on Friday, July 12. US Bancorp has grown to become the fifth largest commercial bank in the United States, with $355 billion in assets.

Money center bank
Wednesday, July 17 before market open; EPS $0.25 / Revenue $22.79 billion

A retail investor favorite, Bank of America (NYSE: BAC) is one of the world’s largest financial institutions with a full range of banking products and services. The company holds a massive deposit franchise and is well-known for its Merrill Lynch brokerage and asset management business.

Expectations are high for Bank of America’s Wednesday release, following a better-than-expected report from competitor Citigroup on Monday. Investors are likely to focus on BAC’s expense management. Under active discussion is whether the Charlotte, NC headquartered Bank of America will be able to grow its top-line revenue as it implements a cost savings plan.

Bank of America is hoping to reduce expenses as its mortgage business remains troubled and unprofitable compared to the years before the 2008-09 financial crisis. In May, the bank reached a $1.6 billion cash settlement with MBIA related to prior mortgages from the credit crisis. Management will likely force a closure of its previous misgivings on Wednesday’s conference call, and shift the attention to core profitability.

For long-term investors, I consider Bank of America to be a solid market perform, however Citigroup is my favorite bank stock.

Southern lender
Friday, July 19 before market open; EPS $0.67 / Revenue $2.16 billion

I wrote positively on SunTrust (NYSE: STI) with my full-length editorial Wall Street Loves This Regional Bank With Southern Flavor back on May 3. The Atlanta, GA headquartered SunTrust is positioned in the attractive Southeast banking market, with exposure to the Florida housing recovery.

Shares of the bank have returned 16.5% in approximately 2 months, compared to a 5.0% return for the S&P 500. With respect to Friday’s upcoming release, investors will be looking to see lower loan loss provisions for the critical Florida housing market. Loan loss provisions are expenses set aside as an allowance for bad loans. All of the major banks have reported lower write-offs so far this earnings season.

In other news, the Federal Reserve granted SunTrust a 2-year extension to new Congressional rules to limit risk-taking activities. Banking regulation has increased to above historical levels as a result of the 2008-09 crisis, which has caused all of the major banks to reduce expenses in order to maintain a normal profitability.

Foolish takeaway

Despite the impressive gains in 2013 for financials, valuations may prove to be inexpensive for long-term investors. All of the major banks have posted record earnings in a difficult market climate, which indicates there’s considerable upside when interest rates recover to normalized levels.

Readers might consider Bank of America, SunTrust, and US Bancorp ahead of upcoming Q2 results. And for long-term investors, the picture is even more attractive based on a steepening yield curve.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market.

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John Macris has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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