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U.S. Bancorp (USB), Bank of America Corp (BAC): Looking for a Rally? Banks to Buy Ahead of Q2 Earnings

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 & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) kicked off a series of bank earnings reports. Both companies beat consensus estimates by a respectable 5% margin. And on Monday, Citigroup Inc. (NYSE:C) 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

U.S. Bancorp (NYSE:USB)U.S. 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, U.S. Bancorp (NYSE: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 U.S. Bancorp (NYSE: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 Corp (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 Corp (NYSE:BAC)’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 Corp (NYSE:BAC) 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 Corp (NYSE:BAC) 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 Banks, Inc. (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.

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