This week our WR Banks & Brokers Index was down -4% WoW, lagging both the S&P 500 by 300bps and the S&P Fins. by 200bps. AMTD was the relative winner this week, down -1%, with LPLA (-2%), GS (-2%) and JPM (-2%) rounding out the rest of the top relative outperformers, showcasing just how tough this week was in terms of share performance as trade tensions weighed on the space. The M&A boutiques were the weakest performers in our coverage once again as EVR and LAZ were down -9% and -6% WoW, respectively, with STT (-7%) and SCHW (-6%) the other relative laggards. YTD trends remain consistent with last week’s Chu (see report) as our top three performers remain SF (+38%), LPLA (+32%), and C (+25%), with GS (+18%) overtaking EVR (+15%) for the fourth spot. LAZ (-6%), STT (-4%), BK (-2%), and WFC (-1%) are all still in the bottom four.
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GS announced its acquisition of United Capital Financial Partners this morning, an RIA with $25bn in AUM and ~220 financial advisors. GS will pay $750mn in cash, with the acquisition expected to close in 3Q19. Bottom line: We believe this deal should ultimately be accretive to GS as it provides natural synergies with the firm’ existing WM capabilities. Looking further down the line, the monetization of client cash / increased deposit gathering also supports key tenets of our bull case; lastly, the FinLife platform (technology platform which is licensed to other RIAs) could also provide an incremental revenue opportunity over time.
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss 2019 stressed losses and payout capacity by bank, who is best/worst positioned for positive payout surprise, SCB lens: implications for capital requirements beyond 2019, and which banks look best in a post-SCB world.
Bank Stress Test (CCAR) season is now upon us and we have started to see a meaningful pickup in investor inbound. Most of the questions have focused on payouts for the upcoming 2019 CCAR cycle and which firms appear most at risk. While our proprietary payout analysis suggests that payouts for some firms could fall modestly below our forecasts (JPM, BAC), the impact to earnings is de minimis and should have limited impact on shares. We are much more focused on the level of stressed losses (aka, Stressed Capital Buffer or SCB) as this will dictate bank capital requirements likely beginning in the 2020 CCAR cycle and thus has much greater implications for future bank ROEs. We explore this topic in greater detail in this report, but wanted to flag some key highlights.
Our WR Banks & Brokers Index is up +2% WoW, outperforming both the S&P 500 (flat) and the S&P Fins. (+1%). Our coverage closed 1Q earnings with strong prints from both SF and LPLA, with the clear winner being LPLA which is up +14% WoW, with shares up +13% on 5/3 alone. Joining LPLA in this week’s top performers are AMTD (+3%), SCHW (+3%), and BK (+3%), which we note all recovered nicely following last week’s tough tape. Our worst performers this week were LAZ (-2%) and EVR (-2%), as negative sentiment across the space continues to wear on M&A Boutiques, particularly following a rough print from GHL. Looking to YTD trends, our top three performers include SF (+44%), LPLA (+37%), and Citi (+36%), with WFC (+6%), LAZ (+5%), STT (+7%) and BK(+6%) languishing in the bottom four.
LPLA reported 1Q19 EPS of $1.93 (ex-amortization) after the close; adjusting for various one-time items, we estimate “core” EPS closer to ~$1.76, vs. our forecast of $1.55 and cons. of $1.59. Vs. our estimate, beat was driven by strong asset-based (both cash sweep and non-cash) and transaction fees, as well as modestly lower core G&A expense. See Ex. 3 for detailed variance. Bottom line: Despite seasonal headwinds in 2Q (lower cash driven by tax seasonality and strong client engagement) and IFP outflows, underlying trends remain quite strong, with accelerating organic asset growth, higher cash yields, and strong 2Q markets (average and EOP S&P 500 up +6% and +3%, respectively) all supporting meaningful upward revisions. With LPLA shares currently trading at 10.8x (a discount vs. 1Y and 3Y averages of 11.3x and 14.4x, respectively), we still view risk / reward as very compelling, and would expect recent share outperformance to continue given meaningful upside to consensus estimates.
. SF shares outperformed the S&P Fins. in a tough tape by ~90bps following a strong 1Q beat (see note), with results surprising positively across more recurring revenue streams (i.e., NII and Asset Management). While estimates should benefit from 1Q flow-through, we believe management guidance in select areas, including share buyback, net interest income (NII), and interest earning asset (IEA) levels, may dampen upward revisions to consensus. Based on updated guidance (see pg. 3), we are raising our 2019E EPS by +1% but lowering 2020E by -40bps, supporting low-to-mid single digit downside to street forecasts as of this writing. With shares currently trading at a discount (10.1x NTM EPS) vs. three-year (12.4x) and five-year (13.2x) averages, as well as vs. peers (11.3x at LPLA / RJF), we still view risk / reward as favorable but see greater upside at peers following the recent runup in shares (+44% YTD vs. +17% S&P Fins.). PT increases to $65 from $62; maintain Outperform rating.
SF reported 1Q19 EPS of $1.32 (ex-items), above both our $1.25 and cons. of $1.21. Versus our estimate, the beat was primarily driven by higher NII as Bank NIM of 317bps meaningfully exceeded 1Q guidance of 300-305bps (+$0.04), as well as higher Asset Management fees (+$0.01), stronger Fixed Income brokerage (+$0.01), and Other Revenue (+$0.02). This was partially offset by a higher tax rate (-$0.01). See detailed variance on pg. 2. Bottom line: Stifel delivered strong results and the revenue mix surprised positively given better-than-expected contribution from more recurring fee streams (NII, Asset Mgmt.), which more than offset softer results in Equity Brokerage. However, we have to acknowledge that the bar appears fairly high following strong results at RJF, and SF share performance has been incredibly strong YTD (+43%), vs. both peers (+23%) and S&P Fins. (+17%). While estimates likely move higher on positive NII flow-through, and shares still trade at an undemanding multiple of ~10.1x (vs. 1Y and 3Y avg. of 9.5x and 12.4x, respectively), we may see limited follow-through given already strong YTD performance.
Our WR Banks & Brokers Index is up only +20bps WoW after a tougher earnings week, lagging the S&P 500 and the S&P Fins. by 80bps. Performance by name was rather mixed, with NTRS (+6%) and LAZ (+4%) the clear winners as 1Q earnings results surprised quite positively and came in much better relative to peers. EVR shares also saw some solid WoW growth (+3%), though we note this was dampened by the disappointing core print (see recap). Worst performers this week were STT (-4%) and AMTD (-3%) given disappointing 1Q earnings and more cautious outlook commentary, respectively. GS (-1%) was among the laggards following recent 1MDB developments, though we believe investor reaction is unwarranted (see note and slide 11). Looking at YTD trends, our top three performers remain SF (+41%), EVR (+35%), and Citi (+34%), with STT (+6%) joining BK (+3%) and WFC (+4%) in the bottom three.
LAZ reported 1Q19 EPS of $0.87, above our $0.60 and cons of $0.65. Excluding ~$0.04 tax benefit, core EPS came in closer to $0.83. Versus our estimate, the beat was driven by stronger revenues in Financial Advisory (+$0.14) and management fees (+$0.02), as well as lower expense (+$0.04) and sharecount (+$0.03). See pg. 2 for our detailed variance sheet. Bottom line: While naysayers have pointed to elevated Non-GAAP adjustments (~$0.07) driving some strength in the quarter and meaningfully rebased EPS expectations over the past six weeks (1Q cons. was closer to $0.79 at the end of Feb.), it’s tough to nitpick these results. Our Underperform Rating on LAZ is largely tied to weakening backlog momentum (-20% YTD, vs. industry -9%) and expectations for sustained growth in non-comps (which beat modestly), and while these results do not alleviate those fears, with shares meaningfully lagging relevant proxies YTD (+1.8%, vs. Wolfe Banks / Brokers Index +16.5%), we would expect shares to Outperform.
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