Fed Governor Lael Brainard noted in a CNBC interview that she is becoming more concerned on economic growth, and that in her view, the process of Fed balance sheet normalization “should probably come to an end later this year”. If the Fed stops asset run-off by year-end 2019, this would be sooner than expected, and should provide some relief on deposit flight / migration risk at the Trust Banks relative to our current forecasts. However, even if we assume deposit pressures begin to abate in 2020, we still believe cons. interest-earning asset (IEA) and NII forecasts remain too aggressive.
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MS announced its acquisition of Solium Capital this morning (2/11/19), a stock plan administration platform with 3,000 stock plan clients and 1mn participants, for cash of $900mn. In our view, this deal reinforces the value of the stock plan business and the importance of operating at scale; in particular we see a positive readacross for ETFC, whose Corporate Services business is one of the leading players in the space. Despite mixed price reaction, early investor feedback has been positive for both MS and ETFC.
With conference season kicking off this week, we wanted to share a few files that we thought might be helpful. The first is our Question Bank, which includes both company specific and general questions for all of the firms in our coverage presenting and/or participating in 1x1s. We also included some Guidance Tearsheets which compare our modeled forecasts to each piece of company guidance in an easy-to-read format. Please feel free to use us as a resource in case you need anything ahead of your meetings.
The Fed published assumptions for 2019 CCAR scenarios after the market close (2/5/19), though this year the release excluded CCAR Instructions which are typically published at the same time. For the 2019 Severely Adverse scenario (which dictates capital targets for individual firms), the Fed does contemplate a more severe recession including a steeper decline in GDP, and a higher spike in unemployment. That said, other aspects of the test appear less severe compared with prior exams, including a more benign equity / credit market selloff (+ for GS, MS, STT), and a less severe rate / OCI shock (+ for STT, BK, BAC; Ex. 5-6). While there are no clear negative outliers among the individual banks, the Fed did highlight a more cautious view on international (both Europe and Developing Asia), which coupled with a higher spike in unemployment (implying higher Card losses), may pose a greater threat to Citi.
LAZ reported 4Q18 of $0.94 vs. our $0.97 and cons. of $0.92, with revenue beat in Financial Advisory and better comp leverage offsetting weaker results in Asset Management and higher non-comps. While results came in ahead of cons., shares were weak following the print as outlook commentary was not particularly encouraging, with LAZ trading down as much as -7% intraday before finishing down -4% (vs. flat S&P Fins.). Looking ahead, outlook commentary on Financial Advisory and Asset Management businesses suggest revenue growth should be limited in 2019 (we model ~4% decline), which, coupled with higher investments in digital, and slightly higher tax rate, support YoY EPS declines of ~8%. We maintain our Peer Underperform rating given downside risk to cons. but note that following the recent decline in shares, risk / reward has improved.
SCHW presented 2019 Outlook and long-term growth targets as part of its Winter Business Update. Investor feedback was negative, particularly on bank growth, with the midpoint of earning asset guidance ~6% below the street. We anticipated that bank growth commentary could disappoint given lofty cons. expectations (see Weekly Chu), but guidance was even worse than we expected, with slower bank growth and expense guidance implying -3% downside to 2019 cons. even with a higher pace of buyback. We were pleasantly surprised by resilient share performance following the update but could see shares lag as investors unpack management guidance and cons. adjusts numbers accordingly. Our new TP of $48 (vs. $49 previously) implies 3% upside, suggesting balanced risk / reward. Maintain Peer Perform Rating.
LAZ reported 4Q18 EPS of $0.94, below our $0.97 but above cons of $0.92. Vs. our estimate, the miss was driven by elevated tax rate (-$0.05) higher non-comps (-$0.10), weaker Asset Management revenue (-$0.03; including $3.2bn of outflows on -11% decline in AUM); and lower other revenue (-$0.01). This more than offset better Financial Advisory (+$0.03), lower comp ratio (+$0.12), and lower sharecount (+$0.01). Bottom line: While the quarter included a number of positives (strong comp discipline, better fees in financial advisory), and a lower sharecount should result in modest positive flow-through to 2019 cons., LAZ shares have outperformed meaningfully over the past week (+6%, >500bps ahead of S&P Fins.) in anticipation of a stronger 4Q print, especially following the impressive beat at EVR. More muted Advisory beat, coupled with disappointing Asset Mgmt. fee trends, should drive a more muted share reaction.
This week our WR Diversified Banks & Brokers Index was up +10bps, trailing the broader market (+160bps) but tracking largely in line with the S&P Fins. (+10bps). We saw meaningful dispersion in terms of share performance as the Retail Brokers and M&A firms were powered by strong 4Q results / favorable guidance, with LPLA (+7%) and EVR (+6%) clear standouts. The biggest laggards this week were the asset sensitive banks and capital markets firms, including BAC (-4%) and MS (-3%). While bank / broker shares took a breather this week, YTD performance has been strong, particularly at those firms which underperformed by a wider margin in 4Q18 but reported strong results including EVR (+26%), LPLA (+23%), and Citi (+22%), while mixed 4Q results have weighed on performance at JPM (+6%), WFC (+6%) and MS (+5%).
LPLA reported 4Q18 of $1.36, vs. our $1.35 and cons. of $1.25. Vs. our est., the beat was driven by stronger cash sweep and transaction fees partially offset by weaker Advisory. Bottom Line: Strong 4Q trends (good organic asset growth, advisor recruiting momentum), continued buyback, and favorable guidance on ICA balances / yield suggest street numbers need to move meaningfully higher. Our updated 2019E is +11% above the street, and we note that this is conservative as we are near the high end of Core G&A guidance for the year. Positive revisions suggest recent share outperformance (+15% YTD vs. +7% S&P Fins.) is poised to continue; with shares trading at only ~10x 2019E EPS, we continue to see very compelling risk / reward (>20% upside). PT increases to $86 from $81; maintain Outperform rating.
SF reported 4Q18 EPS of $1.57 (ex-items), above our (and cons.) of $1.47. Versus our estimate, the beat was primarily driven by robust investment banking (+$0.06), better-than-expected Asset Management fees (+$0.05) and a lower sharecount (+$0.02). This was partially offset by higher expenses, as higher non-comp (-$0.05) outweighed good comp discipline (+$0.03). NIM expanded +2bps in 4Q to 289bps, coming in towards the lower end of management’s guidance range of 288-298bps. Bottom line: Stifel’s strong print reinforces the bull-case narrative, which we note is nicely laid out by management on slide 15, as stronger revenues, good comp discipline and accelerated capital return all contributed to the 4Q beat. While share performance has been strong YTD (+16% vs. +7% S&P 500) following a challenging 2018 (-30% vs. -6%), we would expect shares to outperform off the back of these very good results, with positive revisions likely as our current 2019E revenue estimate ($3.06bn) is at the low end of management’s updated guidance range ($3.05 to $3.35bn).
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