Happy MLK weekend and hope you’re managing OK so far this earnings season. This morning (1/19/20) we published our Universal Bank and Trust wrap which should be in your inbox - in addition to our usual detailed data comparative (which includes the Regional banks too) we spent some more time exploring key stock debates around some of the more controversial names coming out of 4Q earnings. We felt this was important given the sheer amount of inbound we received this week (>4x what we would typically expect during G-SIB earnings). The pickup in inbound wasn’t too surprising as share price dispersion has been pretty significant out of the gate, with some names already posting >9% gains (GS, MS), whereas a handful are tracking down >7% (BK, WFC)... pretty unusual for the G-SIBs.
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The Universal & Trust banks wrapped up earnings this week (with the exception of NTRS). Biggest winners were MS, STT and GS, as strong results and well-executed earnings calls / strategic updates were received very well by investors. On the other end of the spectrum, WFC and BK were the underperformers as weaker results (WFC) and disappointing expense guide (BK) weighed. Our take: Post earnings we remain bullish on the Universal Brokers (GS and MS), and despite strong performance out of the gate (+10% YTD vs. 1% S&P Fins.), we still see a strong case for owning shares. We also remain quite constructive on the Trust banks despite BK’s disappointing expense guide, as our positive view on NII / deposit growth and strong capital return remains intact (see 2020 Outlook). We are still cautious on Money Centers, particularly for WFC where near-term earnings expectations remain too high; with the exception of Citi, we expect little to no PTI expansion for the group in 2020.
STT reported EPS of $1.73, and $1.98 excluding notable items, well ahead of cons. of $1.70 and our $1.73. Adjusting for the lower tax rate, core EPS still came in at $1.90. Versus our estimate, the core beat was driven by stronger topline including higher NII (+$0.01), better fees (+$0.04), and the remainder from lower core expense / preferred interest. Bottom Line: The quarter in of itself was great showcasing improving fee momentum (+5% QoQ, ex gain on sale), greater NII resiliency (-1% QoQ), and good cost control (core expenses flat QoQ). While the 2020 outlook guide is somewhat mixed (fee guide worse, expense / tax guide better), the midpoint still implies LSD % upside to the street, and the revenue guidance on both NII and fees appears conservative. Shares are up >3% pre-market which is encouraging, and given upside to numbers as implied by 2020 Outlook guide, we think the stock holds these early gains. Maintain OP rating.
MS reported 4Q19 EPS of $1.30 vs. our $0.97 and cons. of $1.02. Excluding sizable investment gains (+$0.14), tax benefit (+$0.10), and severance charge (-$0.11), core EPS was $1.17, versus our core of $1.07. Versus our estimate, core beat was driven by stronger topline in ISG (+$0.13), higher investment management fees (+$0.02), offset by higher expense (notably in WM, even adjusting for deferred comp noise). See pg. 3 for our earnings variance sheet. Bottom Line: While there were some disappointments in the quarter (notably WM margin), MS results showcased strong topline momentum (particularly ISG, Investment Mgmt.), good firmwide cost control, and impressive core ROTCE generation (~12%). We continue to believe core EPS power is underappreciated by the street, with improved efficiency, funding tailwinds, and potential optionality from CCAR relief supporting mid-teens ROTCE potential versus 1.3x TBV multiple. Maintain OP.
Gangbusters” NII Result Overwhelms Higher Expenses; Shares, Cons. Heading Higher. BK reported EPS of $1.52, ahead of cons. of $1.40, but below our $1.55 (adjusting for all the “noise”, core EPS came in ~$0.02 above our est. of $0.99). Versus our estimate, the core beat was driven by higher NII (+$0.01), lower credit costs (+$0.01), and lower preferred / tax rate (+$0.02), partially offset by higher core expenses (-$0.02). Bottom Line: While fee trends were more of a mixed bag (FX management fees better; asset servicing, clearing worse) and expenses came in a bit higher than expected, we believe NII strength (+2% QoQ) helped by NIM resiliency (flat QoQ despite the impact of rate cuts) and strong deposit growth (+2% QoQ) should drive positive revisions / share outperformance. BK is one of our top picks for 2020 (see outlook) given our expectation for mid-teens EPS growth in 2020 supported largely by strong NII / deposit expansion and higher capital return, as well as greater EPS resiliency if the macro backdrop weakens. With Fed B/S expansion translating into strong deposit growth in 4Q, and BK improving its capital ratios further in the quarter (CET1 +40bps QoQ), we are confident both tailwinds should translate into meaningful earnings growth in the coming years.
GS (+): Noisy Qtr. – Core EPS (adjusting for “normal litigation” of $150mm, 21% tax rate) came in at $6.49, still ahead of our $5.94 and cons. of $5.47. Versus our estimate, the beat was all on the top-line (+$1.84), helped by very strong results across both trading and Equity Investments / Lending. This was largely offset by higher expenses, including a large litigation reserve (likely for 1MDB), and still higher comp (-$0.34), non-comp (-$0.83), and provision (-$0.21). See pg.2 for our detailed variance sheet. Bottom line: We expect some investors will nitpick sustainability of revenue strength given outsized contributions from Equity Investments / FICC, as well as continued upward pressure on costs, provision. Our take is more constructive, as we believe front-loading of investments and higher litigation accrual positions the firm well to drive improved efficiency / returns in 2020 and beyond. Further, these actions resulted in limited capital drag despite >$2B of buyback in 4Q (CET1 of 13.3%, versus 13.6% in 3Q). We continue to see a clear path to mid-teens ROTCE through-the-cycle, and with shares trading at 1.2x TBV, we still see risk / reward as compelling. Maintain Outperform.
BAC (+): EPS of $0.74 came in above our estimate of $0.69 and cons. of $0.68; excluding the discrete tax benefit (~$0.03), core EPS was $0.71. Versus our estimate, revenues came in a touch better helped by stronger NII (+$0.01), with other items including fee income, operating expenses, provision all on top of our forecasts. See pg.2 for our detailed variance sheet. Bottom line: While trading results were less impressive versus peers (+13%, vs. +56% at JPM, +31% at C) and core fee income (excluding All Other) was a touch light versus our forecast, we are very encouraged by NII resiliency, helped by strong growth in both core loans (Consumer + 7% YoY, Commercial +6% YoY) and deposits (+5% YoY). The responsible growth narrative at BAC remains steady eddy, with robust loan / deposit growth, good expense discipline, favorable credit trends, and strong capital return on full display. With shares trading at 1.8x TBVPS (versus return on capital potential in the upper-teens) we still believe shares have more room to run. Following today’s print, we expect shares to rally, and also see room for upward revisions, as NII strength should more than offset softer core fee trends. Maintain Outperform.
JPM (+): EPS of $2.58 came in above our estimate (and cons.) of $2.35. See previously published First Look.
C (+): Core EPS of $1.90 (ex. $0.25 of tax gains) came in slightly above our estimate of $1.81 and cons. of $1.82. EPS Variance: Better IB, FICC trading, higher NII driven by +7bps NIM expansion, and slightly better efficiency (~57%), partially offset by higher provision. See page 2 for more detailed summary of variance items. (Note: LOB results may not be directly comparable as the firm has moved the commercial banking business from GCB to ICG.) Bottom line: Following strong share performance in 2019, Citi shares have underperformed modestly YTD (+1% vs. G-SIB peers +1.4%, S&P +1.8%) on CECL risk, potential for lower payouts, and concerns the firm will walk back return targets.
The headline beat is quite impressive considering it includes markdowns on legacy PE investments in Corp. / Other. Revenue beat was largely driven by strength in CIB (+$0.16), with other segments in line to slightly below our forecasts; net of PE markdowns / lower NII in corporate, revenue beat was ~$0.07. Expense control was also impressive, with better expense flexibility in CIB and Asset Mgmt. driving ~$0.12. The remaining ~$0.04 upside came from lower provision (+$0.03) and preferred interest (+$0.01); for additional color, please see detailed variance on pg. 2.
Everyone’s back in the saddle, chips have been placed, and the typical deluge of sell side outlooks have hit. So what’s changed and what have we learned? Well for one, it seems that investors have come back quite engaged and we’ve been fortunate to receive an abundance of feedback on our 2020 Outlook and stock calls – hearing from both the bulls and the bears. In this note, we go subsector-by-subsector and company-by-company sharing color from our initial week of conversations. We also outline how these dialogues and clear shifts in sentiment/positioning (e.g. GS, JPM) inform our “refreshed takes” on the stocks.
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