In its recently released 2015 U.S. bank sector outlook, Keefe, Bruyette & Woods (KBW) said it expects a variety of factors to impact bank stock performance in the coming year, including an expected rise in interest rates, continued regulatory and legal risks, and improvements in market and lending conditions.

“Our concern is that a fair amount of net interest margin expansion is already embedded in estimates and investor expectations”

KBW said for 2015, Universal Banks will benefit from improved market and lending conditions including increased market volatility, which should boost trading activity and higher short-term rates, which should result in improved margins. However, these banks will face increased risks outside the United States along with regulatory and legal headwinds.

KBW said it expects the ultimate end point for bank regulatory ratios to finally be determined in the coming year, but it expects those ratios will be meaningfully higher than what is currently required. As a result, upward performance will be limited as returns compress. KBW does not view price-to-earnings valuations as attractive and regulatory and litigation risks also remain a potential overhang on stock performance.

“We are recommending that investors maintain a market weight position in Universal Bank stocks,” noted Frederick Cannon, KBW global director of research. “Universal Banks should benefit from higher short-term rates, but we believe the benefits are already reflected in earnings and valuations. It is our view that upward estimate revisions will be the main driver of stock performance in 2015 for Universals. However, most banks lack tangible catalysts to drive earnings per share above our current estimates.”

To view the full Keefe, Bruyette & Woods news release, click here.