Hopes of the economy opening back up, bank managements defending dividends, VERY constructive trading updates, credit updates which were less bad than feared… there were multiple positive developments which helped bank stocks bounce back nicely this week as we saw a heavy rotation from growth to value. Our Banks / Brokers coverage rallied +7.9%, slightly more than the S&P Fins. (+6.5%), but meaningfully outperforming the broader market (+3%). Biggest gainers this week: MS, STT, and WFC which each rallied +10%; biggest laggards this week: LPLA (+5%), LAZ (+5%), EVR (+4%). YTD the biggest gainers (ex ETFC): MS (-14%) and GS (-15%). YTD laggards: C (-40%) and WFC (-51%).
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Upcoming bank stress tests were expected to be a non-event just a few weeks ago, but with the topic of bank dividends becoming highly politicized, investors have started to focus on the topic of dividend risk for 34 CCAR banks. In this report we analyze four key debates emerging from our discussions with various industry participants and identify those banks which we believe are best / (worst) positioned within our coverage. Bottom Line: We see the Trust Banks as best positioned for healthy payouts in the 2020 CCAR cycle, and while not our base case, we see the greatest risk of dividend cuts at JPM, C.
Happy Memorial Day. This year feels quite a bit different with beaches, tennis courts, and restaurants all closed. Hopefully many of you will be spending some quality ZOOM time with friends and family. I will be hosting a Virtual BBQ with my friends on Sunday and look forward to having them critique the lack of good char on my steak and my inability to grill corn properly. Tough to find a silver lining in all of this but I’m grateful that ZOOM has a mute function.
Uncertainty continues to build around a potentially higher US corporate tax rate in coming years – a distinct possibility both under democratic nominee Joe Biden’s proposed tax plan and under the current administration to help pay for COVID-related government rescue efforts. Based on our discussion with investors, little if any of this risk is priced into the stocks so far, but this may change as tax policy rhetoric builds ahead of the coming presidential election. In this note, we assess earnings risk and valuation implications of a higher corporate statutory rate and provide a plug-and-play Excel model for analyzing potential impact under various assumptions. For instance, under Biden’s proposed tax plan including a federal statutory rate of 28% we calculate EPS and ROTCE drags of -7% and -60bps, respectively, for our bank & broker coverage universe.
We recently hosted Investor Meetings with GS COO and President John Waldron, Co-Head of Securities Jim Esposito, and Head of IR Heather Miner. Takeaways from the meetings were quite positive. Despite investor concerns that COVID stress could impede GS’ efforts to execute on the firm’s Mid-teens ROTCE goal, Waldron seemed much more confident, noting that many of the firm’s initiatives appear to be tracking in line or ahead of plan. While the 2020 operating backdrop from COVID remains challenged for both Goldman and peers, with the trading businesses performing well, and GS better insulated from NII / credit headwinds, we are much more confident in the path to Mid-teens ROTCE.
This week was surely not lacking in exciting news flow from Powell’s cautious testimony, Quarles’ (perceived) hawkish dividend rhetoric, and M&A speculation that bordered on the absurd (GS & WFC merger – what a brilliant idea some banker pulled from his Highdea Journal). The market fared poorly, and our stocks (once again) fared even worse, with the Money Centers and eBrokers the biggest laggards. We had a lot of inbound this week and the questions really focused on a few select names and trade ideas: 1) Long Brokers vs. Banks has worked well – are we still confident in the pair?
Audette once again outlined a compelling investment case: Step up in pace of organic growth (MSD+ %), flat to improving fee rates (higher Gross Profit ROA ex-cash), core G&A flexibility, and balance sheet capacity to support growth initiatives and / or accretive M&A. In this report, we review these inputs into the company’s earnings growth algorithm and reconcile share performance and valuation trends. 1Q earnings marked an inflection point for ests.: LPLA shares started the year off strong but underperformed meaningfully through late March on ICA / equity market headwinds + crowded positioning. More recently the stock has closed the performance gap on the heels of strong 1Q earnings / upward revisions.
Last week we took a bit of a breather on the weekly. This week we did anything but. Now that the banks have started to publish 10-Qs we have started to dig into some of the newer credit disclosures, unpacking reserve levels by loan category, how that compares with stress losses (both Fed and company-run), key differences in CECL assumptions, and a summary of MD&A Outlook Commentary. There is significant dispersion across the banks as it relates to key assumptions on credit and we discuss positive / (negative) outliers in the slides.
This has been a very rewarding but exhausting earnings season. After five straight weeks of the team and I working 16+ hour shifts and neglecting our spouses / SOs, kids, parents, siblings, pets, and houseplants, we are taking it a bit easier this weekend with a lighter weekly than usual. Many of you were kind enough to suggest that I give the team a breather this week – I would agree that they’ve certainly earned it. Rest assured that all of the relevant data tables and charts have been updated per usual but we are taking the weekend to recharge the batteries and would encourage you to do the same. To help properly motivate all of you to get some quality time with your loved ones after a brutal five-week stretch, we included a sneak peek into some of our own personal lives - in particular, a look into our work from home setups and where we spend our (very limited) free time.
SF, LPLA, and LAZ wrapping up earnings season, we examine key themes and areas of investor focus across the stocks. At a high level, coming out of earnings we continue to favor LPLA vs. more credit / capital markets sensitive peers (RJF, SF), and maintain our cautious outlook on the M&A Independents over the near-to-intermediate term as deal activity has ground to a halt. For LPLA, an impressive beat-and-raise 1Q underscores our preference for the stock: no credit risk, no capital markets exposure, best-in-class, accelerating organic growth, and compelling valuation (<10x 2021E). And in the context of a financials cohort that has rallied sharply off March lows (all on multiple expansion) and where risk/reward now seems more balanced, LPLA remains a positive outlier and one of our top picks.
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