Although the “money center” banks like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) are down sharply since late March, regional banks are off just 3% in that period. Because of that, investors should be picky when looking at the regionals, argues Deutsche Bank analyst Matt O’Connor.
There are plenty of other reasons to be careful, O’Connor notes. Although 15 of the 17 banks that Deutsche Bank covers technically beat estimates during this earnings season, most of the upside came from items that may not be sustainable going forward.
And net interest margins are likely to cause banks more trouble in the quarters ahead.
“Net interest margins were down just slightly on average and remain okay for now, but are not sustainable if rates remain at current levels. Four Regionals either missed on NIM/net II (Comerica (CMA), KeyCorp (KEY)) or lowered the outlook (Fifth Third Bancorp (FITB), Regions Financial (RF)).”
There were some bright spots, however.
“Capital markets revenues were weak in 2Q, but not as bad as feared,” he wrote. “Mortgage revenues were strong and will likely remain so.”
In the near term, O’Connor likes two stocks: Fifth Third and TCF Financial Corp. (TCB).
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