Wed, 29 Apr 2015
Morningstar's Dan Werner expects continued pressure on net interest margins, increased fee revenue, a focus on expense controls, and strong trading revenue for investment banks.
Dan Werner: With most of the big banks reporting first-quarter earnings so far, we see four major themes for this sector that we believe will continue for much of 2015.
First, net interest margin will continue to be under pressure as average yields on earning assets continue to decrease from already low levels. With net interest income being the largest source of revenue for banks, absent significant loan growth, we think it will continue to decrease.
Second, we see strong trading revenue from most of the investment banks, such as Goldman Sachs (GS) and Morgan Stanley (MS). In the face of quantitative easing in Europe and speculation of Federal Reserve moves, this has created a volatile environment for their fixed-income and foreign-exchange trading platforms.
In the face of net-interest-margin pressure, banks have focused on trying to generate more fee revenue for their businesses. In the first quarter, we saw this with solid mortgage revenues and gains on sale. With a strong purchase market, we think this will continue for the remainder of the first half of 2015.
Lastly, those banks that can control their expenses tend to have moats that lead to excess returns, and expense control continues to be a focus for all the banks for 2015. As for names that we like so far, we like those focused on consumer businesses like Capital One (COF), Discover (DFS), and American Express (AXP). For longer-term holders with strong franchises, we like U.S. Bank (USB) and PNC Financial Services (PNC). For those who want a foreign flavor, we like the low-cost operations of Banco Santander (BSBR).