PNC...The Big Winner From The Rate Hike?

• In a report issued Tuesday, Deutsche Bank analyst Matt O'Connor shared a preview of the fourth quarter for U.S. banks.
• The expert also provided his 2016 outlook for the industry.
• So, which bank stocks are the firm’s favorites?

In a recent report, analysts at Deutsche Bank took a look into some of the key themes for U.S. banks in 2016. The experts explained which banks stand to benefit from the Fed rate hike and shared their thoughts on how investors should be positioned for next year, assuring they favor “highquality super regionals over market sensitive banks.”

High Quality Super Regionals

The main themes for 2016 will continue to be interest rates, the overall economy, capital deployment (including M&A activity) and credit, the report expounded.

From a macro standpoint, the analysts believe GDP growth will remain slow. Consequently, they anticipate just one more rate hike will take place in 2016, “the yield curve will continue to flatten, capital markets activity will remain sluggish and credit blips (such as in energy) are possible.”

In this backdrop, they think high quality regional banks will outperform market sensitive and lower quality regional banks.

Deutsche Bank’s top picks for 2016 are:

• PNC Financial Services Group Inc (NYSE: PNC), Buy rated, $101 price target
• U.S. Bancorp (NYSE: USB), Buy rated, $47 price target
• Wells Fargo & Co (NYSE: WFC), Buy rated, $60 price target

On the other hand, the experts remain underweight market sensitive banks, although they still rate Bank of America Corp (NYSE: BAC) a Buy “given less execution risk, macro leverage, cost saves, and capital build.” Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS) and Citigroup Inc (NYSE: C) are Hold rated.

Key 4Q Themes

As per the report, the main themes for the fourth quarter will be capital markets, loans/NIM and energy reserves.

The analysts assured capital markets revenue is expected to be weak, same as corporate banking, trust/asset management, and brokerage fees.

Within the traditional banking space, loan growth remains robust and NIMs are stabilizing. On the other hand, service charges and mortgage are still under pressure.

They noted that “reserve build for energy is likely to continue, although only a few banks disclose energy reserves."

The Big Winner From The Rate Hike

Finally, the analysts pointed out that the biggest beneficiary of the rate hike (at least for the first quarter of 2016) will be PNC. “The recent Fed rate hike will boost PNC’s 1Q NIM by 10bps (or $85m in net II). The FY 2016 boost may be closer to $150-200m as liability repricing catches,” they concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.