Bank earnings could be all over the place after the sector's volatile first quarter, but top Morgan Stanley analyst Betsy Graseck thinks there are three names that will stand out. Bank stocks have had a wild ride this year, and Morgan Stanley analysts worry that the higher likelihood of a recession will outweigh positive trends around higher interest rates and greater loan growth for the sector. In the first quarter, bank stocks in Morgan Stanley's coverage outperformed the S & P 500 by 13 percentage points on a market cap weighted basis through mid-February. Then, they underperformed by 15 percentage points through quarter end. The volatility promises quarterly reports that will be "tricky to navigate" for investors. Still, Graseck has some preferred picks that the analyst believes will do especially well with increasing rates and loan growth. Here are Graseck's three favorite bank and consumer finance stocks heading into the earnings season: Wells Fargo was named a top pick by Morgan Stanley, which said the bank is the "most rate-sensitive stock" in their coverage. Graseck noted that Wells Fargo will likely increase its guidance for net interest income (NII) in its upcoming earnings report. Net interest income measures the difference between revenue generated and expenses paid on a bank's interest-bearing assets and liabilities. Morgan Stanley also believes Wells Fargo could "surprise positively" on buybacks. Shares of Wells are down 2% this year. On Thursday, they fell 1.8%. Wells Fargo is slated to report earnings on April 14 before the bell. Signature Bank also made Graseck's list. The stock is down 18% this year, but the analyst said that Signature's sensitivity to interest rates, an excess of liquidity and a lack of exposure to Russia will boost the company going forward. Morgan Stanley expects Signature's bank deposits will grow by 4% and 19% in the first and second quarter of 2022, respectively, as adoption of the bank's digital payments platform Signet grows. A cash surplus to deploy into securities will also bolster Signature, Graseck said. Shares for Signature Bank dipped 4% on Thursday. Signature is slated to report earnings later this month. American Express is another top pick heading into earnings for Graseck. The stock is up nearly 10% this year, and Morgan Stanley believes the company will continue to benefit from reaccelerating billings growth and repeat its performance in the previous quarter as the "strongest card loan grower" in analyst coverage. "While NIM should face pressure from higher rates, liability sensitivity doesn't matter much when you're putting up high-double-digit loan growth," the note said. Shares for American Express dipped 1.8% during Thursday trading. The company is slated to report earnings on April 22. —CNBC's Michael Bloom contributed to this report.
A man walks past a Wells Fargo Bank branch on a rainy morning in Washington.
Gary Cameron | Reuters
Bank earnings could be all over the place after the sector's volatile first quarter, but top Morgan Stanley analyst Betsy Graseck thinks there are three names that will stand out.