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The Q4 earnings season is knocking at the door and investors are keen to see how major banks will perform this time, after reporting impressive results in the first three quarters of 2017.

The last year has been a roller coaster ride for banks. Though the year begun on an optimistic note with high expectations from President Trump’s electoral promises, it lost some steam in the middle only to regain the bullish trend at the end.

Banks showed resilience driven by the Fed’s hawkish stance (three rate hikes in 2017) and the gradually improving U.S. economy. Also, progress on the lesser banking regulation front cheered investors.

Further, the new tax act drove the banks too. While the act will result in gains for banks over the long term, the to-be-reported quarter earnings will be adversely affected by huge one-time charges related to the changes in the tax law.

Additionally, factors that weighed on major banks’ prior-quarter results persisted in Q4 as well. These, including trading weakness, slowdown in mortgage banking and stable net interest margins, will likely hamper profitability of major banks. On top of these, the above-mentioned charges add fuel to the fire.

Also, while the absence of considerable legal expenses is a positive, increased investments in technology to improve digital offerings is expected to escalate costs moderately.

As such, major banks in the S&P 500 index (accounting for nearly 45% of the Zacks Finance sector'stotal earnings) are expected to witness a 6.3% year-over-year decline in earnings in the to-be-reported quarter. This compares unfavorably with 6.5% growth recorded in the prior quarter.

(For detailed look at the earnings outlook for this industry and others, please read our Earnings Analysis article).

Nevertheless, strength in investment banking driven by a potential rise in equity issuances (strong rally in the equity market globally) and persistent increase in debt underwriting (mainly on assumption of continuous increase in interest rates) is expected to provide respite to some extent.

In addition to the benefits from the rising interest rates, a slight improvement in lending, particularly in the areas of commercial and consumer will offer marginal support interest income for banks.

Further, credit quality is anticipated to remain strong, backed by an improving economy and conservative underwriting standards.

Choosing the Winners

While the upcoming results are not likely to be impressive, there are still a few major banks that are expected to outshine their peers. So, this is the right time for you to select some banking stocks that are well positioned to beat earnings estimates in their upcoming releases.

Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) — and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

5 Major Banks Set for Earnings Surprises

Here are five major regional bank stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:

The PNC Financial Services Group (PNC - Free Report) is slated to release results on Jan 12. The company has an Earnings ESP of +0.41% and sports a Zacks Rank 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wells Fargo (WFC - Free Report) has an Earnings ESP of +0.76% and a Zacks Rank 3. The bank is scheduled to report results on Jan 12.

Comerica Incorporated (CMA - Free Report) has an Earnings ESP of +0.31% and sports a Zacks Rank 1. The company is slated to release results on Jan 16.

The Earnings ESP for U.S. Bancorp (USB - Free Report) is +0.13% and it carries a Zacks Rank 3. The company is scheduled to release results on Jan 17.

BB&T Corporation (BBT - Free Report) has an Earnings ESP of +0.28% and carries a Zacks Rank 2. It is scheduled to report results on Jan 18.

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