This week was a busy one for both us and investors, with plenty of company presentations, headlines, and management meetings. In this iteration of the Weekly Chu, we provide some perspective around eBroker share performance following a recent announcement from Square that it is testing free trades, as well as our thoughts regarding recent headlines that SCHW will be cutting 3% of its workforce. This week we hosted three separate sets of investor meetings (with management teams at Morgan Stanley, LPL, and Evercore); while we will be publishing more in depth thoughts in the coming days, in our Weekly today we run through first thoughts following the meetings and where we heard most positive client feedback. Lastly, we would encourage clients to check out the webcast on the Momentum Crash that our excellent QES team hosted last week, which walks investors through the recent moves in momentum and value factor investing.
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This week we are looking ahead to conference season with a few things to help you prepare. First we published our updated Question Bank with a refreshed list of the top questions we have for each company that is presenting or hosting 1x1s next week – see our Question Bank, and a table of supporting materials (model, summary of management guidance) below. Next, we’ve had a lot of inbound on our thoughts on the Trust Banks, so we wanted to discuss how we think about the setup for these stocks into the conference and earnings. Also, we know with the long weekend last week, some investors may have missed it, so we wanted to re-highlight some interesting analyses on trading NII and why we think BAC, C and JPM could surprise positively even in a falling rate environment.
Conference season is upon us. To help investors prepare for company presentations / 1x1 meetings, we have updated our question bank, which includes a list of our top questions for each company.
Fed Quarles Recommends Changes to SCB; See Greater Risk to Firms with Better CCAR Track Records. Fed Vice Chair for Supervision Randal Quarles gave a speech this morning discussing refinements to the Stress Capital Buffer (SCB) proposal. He noted two key changes the Fed hopes to implement: 1) Removal of the Stress Leverage Buffer; and 2) Removal of the requirement to prefund four quarters of dividends, to be replaced with either a higher SCB floor, or a higher Countercyclical Buffer (CCyB). Our Take: Overall, we see greater risk of higher CET1 requirements at the banks with better CCAR track records (BAC, WFC, BK, STT, and NTRS). We estimate both options could increase required CET1 by up to 3% of market cap for WFC, BAC, and STT, with GS and MS the greatest beneficiaries of these potential changes (3-4% decline in required CET1 as % of market cap under Option 2; 1% decline for MS under Option 1).
When we launched on SCHW in Sep’18, we took a cautious view as cons. forecasts for bank / NII growth were much too aggressive. 12M later this thesis is largely played out with cons. EPS declining >15% and earning asset forecasts declining >20%. Over that same period shares have meaningfully underperformed (down -26%, vs. S&P Fins. -6%) on fears of recession / more aggressive Fed easing. While we do not expect any meaningful improvement in the rate outlook near term, we believe downside risk from rate cuts (we are modeling five total by YE’20) are already in numbers, with potential upside in 2H20 / 2021 from improving cash sorting trends and USAA deal accretion. Investor sentiment on SCHW is quite negative but we see a compelling opportunity to own a best-in-class franchise trading at a bargain level price.
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss his Charles Schwab upgrade to Outperform, going over the team's reasoning that risk/reward is compelling at 3x upside:1x downside, investors are too harsh when estimating "trough" EPS, the team sees upside to NII as higher cash balances, USAA not in cons., margins should be defensible given track record of expense flexibility, and better organic growth warrants premium multiple vs. peers.
We explore a really important and largely overlooked topic of Trading NII, arguing that JPM, C, and BAC could all surprise positively on trading revenue in the coming quarters as lower funding costs from additional rate cuts are not baked into cons., with our analysis implying as much as a 10% boost to trading revenue for C and (possibly) BAC if activity levels hold steady. And since we have given much love to Goldman in recent months (and yes, we still like it), we wanted to shift gears a little bit and highlight Citi on the long side as the stock looks quite compelling following recent underperformance, especially given lower sensitivity to Fed rate cuts and peak valuation discount versus G-SIB peers.
As we enter the last week of August we recognize clients are likely enjoying a much-needed break. Steven is coming back from a week in Delaware with the fam, and we are keeping it relatively light this week by exploring a number of interesting pair trade ideas, which we outline on slides 4-7 for those that are interested. Next, we recap RJF / LPLA monthly metric takeaways for investors who may have missed the July prints, and provide context as to how results stack up relative to the eBrokers (slide 8).
This week we discuss some recent feedback from investor marketing, digging into some key issues surrounding four battleground names where we’ve seen the strongest interest from clients: 1) State Street; 2) Charles Schwab; 3) Raymond James; and 4) Goldman Sachs. We also provide some updated analysis on what RJF’s latest increase in its repurchase authorization means for shares / earnings, address some big management changes at E*TRADE and what that means for the M&A narrative, and in response to investor inbound post the recent market selloff, identify which subsectors have the greatest equity market sensitivity. And while we still have a few weeks until Sept. conference season kicks off, we included a number of exhibits reflecting some of the latest guidance on NII from the Trusts, Brokers, and Money Centers, and where we see the biggest risk of disappointment vs. 3Q consensus / management guidance.
We recently met with JPM Chairman / CEO Jamie Dimon, and Head of IR Jason Scott. The meeting proved quite timely as it was immediately following the July FOMC meeting. Discussion focused on the global macro and geopolitical landscape, newer growth initiatives (Payments, You Invest), competition (esp. with big tech), and future investment plans.
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