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'Noisy' fourth quarter for banks, but bright 2018 ahead, say analysts

  • It may be a tough quarter for banks this earnings season, but all signals are pointing to a brighter future in 2018, analysts told CNBC on Thursday.
  • Banks may see losses in the fourth quarter as they prepare for changes in the tax code, but the sector will benefit from lower corporate rates in 2018, said Barclays' Jason Goldberg.
  • CFRA's Ken Leon said taxes and good earnings in 2018 will improve big banks' ability to return capital to investors next year.

It may be a tough quarter for banks this earnings season, but all signals are pointing to a bright future in 2018, analysts told CNBC on Thursday.

As the big banks prepare for changes to the tax code, they'll see significant charges that could cause them to post losses for the fourth quarter, said Jason Goldberg, senior equity analyst at Barclays.

For example, Citigroup could take about a $20 billion upfront hit when it writes off deferred tax assets.

However, investors should look beyond the noise of this quarter because all banks are going to benefit from lower corporate tax rates, Goldberg said in an interview with "Power Lunch."

That's because a lot of their earnings are U.S. domiciled, he explained.

"Some of that will get eaten up by either increases to minimum wages or some banks have talked about one-time bonuses, but you are going to get a portion of that going to the bottom line which is going to support dividends, buybacks, and importantly customer growth and loan growth should these measures turn stimulative for the economy," he added.

Ken Leon, global director of industry and equity research at CFRA, believes it's possible banks may use the write-downs as an opportunity to add more liabilities and charges in the fourth quarter.

"That gives momentum for a cleaner 2018," he told "Closing Bell."

Leon also isn't necessarily concerned that the tax adjustments in the fourth quarter will impact 2018 share buybacks.

"We think J.P. Morgan especially will talk about how it's going to improve their ability to return capital and dividends and buybacks next year, as the other banks," Leon said.

And it's not only the "tax effect," he said. "We're going to have terrific earnings in 2018. That's going to flow down to capital."

He advises investors to stay focused on the core business and the banks' ability to grow.

For one, loan growth has been modest and he expects the yield spread to widen through 2018 as the Federal Reserve increases interest rates.

"That creates more opportunities for higher earnings for these banks," Leon said. "Also, they're putting a lot of efforts on cost controls."

J.P. Morgan Chase, along with BlackRock and Wells Fargo, kick off the financial earnings season Friday morning.

Leon has a buy rating on J.P. Morgan and a hold on Wells Fargo. His top pick is Bank of America, which he said is "firing on all cylinders."

For his part, Goldberg expects JPM to have another good quarter. He has a $132 price target on the stock and an overweight rating.

"On a relative basis they continue to take market share across both their retail and wholesale businesses," he said. "They're buying back a fair amount of stock. They seem to have a good line on the cost side," he said.

Goldberg also has an overweight rating on Wells Fargo and a $75 price target.

"They are not fully out of the woods yet but they've made, I think, great strides in putting some of these legacy issues behind them in terms of the retail sales practices, kind of improving the culture, kind of weeding out and changing out some of the executive team," Goldberg noted.

— CNBC's Gino Siniscalchi contributed to this report

Disclosures: JPM and WFC are investment banking clients of Barclays. Barclays Bank PLC and/or an affiliate is a market-maker in debt/equity securities issued by WFC and JPM. WFC and JPM are, or during the past 21 months have been, a noninvestment banking client.

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