STT reported 3Q19 EPS (ex-items) of $1.52, above our $1.44 (ex items), and cons. of $1.39 Versus our estimate, beat was primarily driven by higher NII (+$0.02) and lower expenses (+$0.07), partially offset by weaker results in CRD. See pg. 2 for detailed variance. Bottom Line: Bulls “got what they came for” this quarter as the company surprised positively on NII / expenses, with commentary suggesting deposit momentum / expense discipline should continue. While fee trends were somewhat mixed, and 4Q guidance (per Slide 13) implies very modest downside versus current cons., we expect investors to look past this, as higher earnings assets / commitment to drive expense savings, and robust buyback yield (9%) should drive upward revisions.
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ETFC reported 3Q EPS after the close of $1.07 vs. our $1.01 and cons. $1.00. However, despite positive trends in 3Q (beat on revenues across both NII and fees, higher cash balances, etc.), results were overshadowed on the call by questions surrounding potential for M&A / strategic alternatives. Bottom line: Management had a very tough task on the call having to address concerns relating to pricing developments and the need to walk back prior EPS targets (along with the timetable). We thought Pizzi and Turner did a good job of outlining new expense initiatives aimed at defending their operating margin while reiterating the Board’s willingness to remain open to potential suitors. While we came out of the call no more or less convinced on the likelihood of takeout, we do believe that higher cash balances and more aggressive expense initiatives should drive cons. higher and support a higher standalone valuation.
. MS reported 3Q19 EPS of $1.27 vs. our $1.10 and cons. of $1.11; adjusting for $89mn tax benefit, core EPS still came in at ~$1.21. Versus our estimate, core beat was driven by better FICC (+$0.10) and IB fees (+$0.04), as well as higher WM NII (+$0.01), which was largely offset by negative investment / other revenue (-$0.04). See pg. 2 for our earnings variance sheet. Bottom Line: MS delivered standout results across their Institutional businesses in a challenging quarter (trading +7% YoY, IB +5% YoY), with NII and key drivers also surprising positively (WM loans +3% QoQ, deposits +2% QoQ). MS (alongside GS) has been one the biggest laggards in our coverage on a 1M basis (-4.4%, vs. S&P Fins. -1.0%), but given the strength in these results, and undemanding valuation (1.1x TBV, vs. 3Q core ROTCE of ~12.5%), we should see shares outperform.
BAC reported headline EPS of $0.57; adjusting for the impact of JV dissolution (+$0.19) and lower tax rate (-$0.03), core EPS came in closer to $0.72, versus our comparable $0.67 and cons. of $0.69. Versus our estimate, the core beat was driven largely by higher NII (+$0.01), lower provision (+$0.02) and better cost control (+$0.03), which was partially offset by a higher loss in the opaque “other income” bucket (-$0.01). See pg. 2 for our detailed variance sheet. Bottom-Line: BAC shares have traded largely in line with the BKX and G-SIB peers over the past three months given ongoing macro / rate concerns, but this result highlighted broad-based franchise strength with better NII / loan growth (including benefit from lower funding costs in Global Markets), standout capital markets results (particularly IB and Equities), strong credit performance, and good expense discipline. We expect shares to outperform, with higher NII “jump off” and positive expense surprise likely to drive upward revisions.
BK reported EPS of $1.07, ahead of our $1.01 and cons. of $0.99. Adjusting for one-time items (lease impairment, lower tax rate), we estimate core EPS was closer to ~$1.04. Versus our estimate, the core beat was driven by higher NII (+$0.01), lower expenses (+$0.01), and higher reserve release (+$0.01). While fees were more in line with our forecast, they came in above cons. beating on servicing, clearing, and issuer services. Bottom Line: BK shares have lagged meaningfully following the abrupt departure of CEO Charlie Scharf, but consistent with our recent U/G, we see reasons for optimism including more robust deposit growth (+3% QoQ), good core expense control (-3% YoY), and meaning capital return (~10% buyback yield). We expect shares to outperform following today’s beat, with estimates likely heading higher as well.
JPM (+): Core EPS of $2.59 (ex gain on loan sales) came in well above our estimate of $2.49, and cons. of $2.45.
Key drivers of beat (versus our estimate): Stronger fee income and NII, as well as better efficiency (55%), with credit largely in line (see detailed variance on pg. 2). More notable is the update to 2019 Outlook slide where management lowered the expense target to $65.5bn (previously <$66bn) and raised the NII guide to <$57.5bn (vs. ~$57.0bn previously). Bottom line: While the bar for JPM appeared somewhat lofty given recent share outperformance (L3M: >200bps vs. BKX, >300bps vs. S&P Fins.), we expect shares to react positively given a very strong 3Q result and better outlook guidance for both NII and expenses. Higher NII “jumping off” point for 4Q19 and stronger flow-through from outsized CIB beat should prompt upward revisions and help alleviate investor concerns that 2020 cons. appears too high.
It’s that time again… We are once again heading into earnings, with C, JPM, WFC, GS, and SCHW kicking things off on Tuesday (10/13/19) (thanks a lot, guys). In last week’s Chu, we highlighted feedback on our big bank earnings preview, and this week we are focusing on the latest feedback on the Brokers, particularly ETFC. There were two key sources of inbound from investors this week. The first is ETFC game theory, where we unpack some of the assumptions in our merger models and quantify the takeout probability that is currently priced in. Following our upgrade of BK, we continue to have significant inbound on what Fed balance sheet growth could mean BK deposit / earning asset growth, and whether the other Trust Banks stand to benefit here as well. With early speculation suggesting the Fed balance sheet could grow as much as $500bn (>10%) over the next twelve months, our sensitivity analysis suggests the impact to earnings could be meaningful (see slide 6).
Price War Update: Opportunities to Leg In – LPLA, RJF, SCHW Most Preferred. Broker stocks have lagged following the “race to zero” commissions and a wave of sell side downgrades. Despite significant cuts to earnings, we see the eBrokers as more interesting longs here, notably ETFC (M&A premium, buyback) and SCHW (valuation, organic growth). While the setup is good for the eBrokers, it is arguably much better for the Regional Brokers (LPLA, RJF, SF) given: 1) Less downside to cons.; 2) Limited EPS risk from free Equities / ETFs (<2%, we est.); and 3) Misunderstanding of Warren / DOL risk. To better frame risk / reward opportunities, we analyze five key debates, with our findings supporting LPLA (Top Pick), RJF, and SCHW as our preferred names:
This week was incredibly busy with the majority of our client inbound focused on the eBrokers and the impact of zero commissions. In this week’s Chu we address three key questions pertaining to the price war debate, including: 1) what’s priced into the eBroker stocks; 2) updated thoughts on eBroker multiples following this week’s price cuts; and 3) where we see the most compelling investment opportunities given this week’s price action.
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