How To Trade Bank Earnings Season

With Q3 earnings season for big U.S. banks set to kick off in mid-October, Morgan Stanley analyst Betsy Graseck sees a potential opportunity for patient traders. In a new report, Graseck explained why the perfect time to buy big bank stocks could be coming soon.

Downward Revisions Coming

Morgan Stanley has a bullish outlook for U.S. banks in the longer term, but Graseck believes that traders should remain patient for now.

In her report, she reduced Morgan Stanley’s Q3 earnings estimates for the sector by about 10 percent. In addition, Graseck noted that she expects other firms to follow with EPS estimate reductions in the weeks leading up to earnings season, which will likely pressure bank stocks.

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Earnings Themes

With 10-year treasury yields falling 0.32 percent in Q3, Graseck expects that the net interest margins (NIMs) of the banks were once again squeezed in the quarter.

However, the recent Federal Reserve numbers suggest that loan growth during the quarter came in stronger than expected, which could boost bank bottom lines.

The wildcard for the quarter remains expense management. A persistent challenging revenue environment has prompted major expense overhauls at most banks. Graseck is looking for Q3 cuts to occupancy, FTE count and third-party spend.

Top Picks

The trade Morgan Stanley is waiting for is to buy top picks on earnings revision dips ahead of earnings season. The firm prefers Bank Of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C) and Regions Financial Corp (NYSE: RF) and sees 27 percent upside to the group.

Disclosure: The author owns shares of Bank of America.

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