Deutsche Bank's favorite bank stocks are Goldman, JPMorgan following earnings results

Published Thu, Jan 26 20172:11 PM EST

Deutsche Bank on Thursday revealed its favorite financial stocks, selecting Goldman Sachs , JPMorgan and Wells Fargo as its top picks given the earnings potential in the months ahead. "We continue to prefer market sensitive banks over large regionals. This reflects our view that leverage to rising rates may already be mostly (or more) priced in while there may still be upside to capital market businesses (particularly in FICC [fixed income, currencies and commodities]) from a stronger economy and a less onerous regulatory environment," equity analyst Matt O'Connor wrote in a note to clients. Deutsche Bank believes balance sheet growth will be as important as higher interest rates in 2017 and beyond, a trend that some investors might be missing by blindly buying the entire financial sector. "[Net interest margins] are only half of the driver of net interest income — with balance sheet growth equally important. Balance sheet growth is also diverging, with some asset sensitive banks experiencing very little growth (such as BAC and RF)," O'Connor said. Net interest margin, or NIM, measures the difference between the interest income generated by banks and the amount of interest paid out to their lenders. On Goldman Sachs and JPMorgan, O'Connor writes: "Both have robust leverage to a stronger macro environment, both have made good progress on cost control in recent years and both have a number of leading franchises (which should reduce the need to invest/catch up) if macro conditions continue to improve (a risk for some peers in our view)." Apart from a positive macro environment, Deutsche Bank says Goldman Sachs and JPMorgan trade at favorite valuations. "On our 2018E, GS trades at 9.3x vs. 11.1x for peers and has the highest earnings growth in 2017 and 2018 relative to peers," O'Connor wrote. "JPM shares trade in line on both our 2017E and 2018E (despite higher returns)," he said. In the next 12 months, Deutsche Bank predicts Goldman could trade as high as $255, implying a gain of 7 percent from Wednesday's close, while JPMorgan could go as high as $90, suggesting a gain of 5 percent from here. Deutsche Bank says there's also an investment opportunity around shares of Wells Fargo, which after a rough patch in 2016 are back near a 52-week high. "We continue to believe most of the bad news surrounding the company's sales practices is priced in at current levels and that the valuation discount will narrow over time. Shares trades at 12x our 2018E or a 15 percent discount to peers (despite ROTCE [return on average tangible common shareholders' equity] 200-300bps above other large regional peers)," O'Connor wrote. In the next 12 months, Deutsche Bank says Wells Fargo could trade as high as $60, implying a gain of 6 percent from Wednesday's close. — CNBC's Michael Bloom contributed to this story.

Lloyd Blankfein, chairman and CEO of Goldman Sachs at the World Economic Forum in Davos, Switzerland.

David A. Grogan | CNBC

Deutsche Bank on Thursday revealed its favorite financial stocks, selecting Goldman Sachs, JPMorgan and Wells Fargo as its top picks given the earnings potential in the months ahead.

"We continue to prefer market sensitive banks over large regionals. This reflects our view that leverage to rising rates may already be mostly (or more) priced in while there may still be upside to capital market businesses (particularly in FICC [fixed income, currencies and commodities]) from a stronger economy and a less onerous regulatory environment," equity analyst Matt O'Connor wrote in a note to clients.

Deutsche Bank believes balance sheet growth will be as important as higher interest rates in 2017 and beyond, a trend that some investors might be missing by blindly buying the entire financial sector.