JPM reported 1Q19 EPS of $2.65, well ahead of our est. of $2.38 and cons. of $2.35. Adjusting for a lower tax rate (~$0.06), core EPS still came in well ahead at $2.59. Vs. our estimate, strength was broad based, driven by higher revenues across both NII (+$0.01) and fee income (+$0.06), as well as lower expenses (+$0.16). This was partially offset by higher provision (-$0.01) and sharecount (-$0.01). See pg. 2 for our detailed EPS variance. Bottom Line: With JPM shares having lagged both peers and the broader market by a healthy margin YTD (+8.8%, vs. peers +16.5% and S&P +15.2%), we expect the stock to get a nice boost off the back of today’s strong print. Valuation also looks undemanding with shares trading at ~1.8x TBVPS (vs. 19% ROTCE in 1Q19) which should provide additional support to the stock.
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Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss what GS may be on the hook for (fine, restitution, forfeiture), sizing cumulative 1MDB liability/settlement, navigating multiple jurisdictions in settlement talks, and tail risks: DOJ leverage over Goldman in any negotiation.
Our WR Banks & Brokers Index was up +5% WoW, which we note continues to outpace both the S&P 500 (+2%) and S&P Fins. (+3%). Strength was driven by robust performance across SF (+9%), MS (+6), and RJF (+6%), with WFC (+1%), BK (+1%) and EVR (+3%) the biggest laggards. Following the strong week, our WR Bank / Broker index is now tracking in line with the broader market YTD (+15%) and ~400bps ahead of the S&P Fins. (+11%). SF (+39%), EVR (+31%), and Citi (+26%) still atop the leaderboard, followed by GS (+21%), LPLA (+18%) and BAC (+18%). LAZ (+3%) and AMTD (+6%) remain in the bottom three joined by new-entrant WFC (+6%) in place of SCHW (+7%) as investors remain wary on the name following the recent leadership shake-up (see slide 11). For folks looking to get a sense of how our coverage has been trading from a technical perspective, we would urge investors to look at Technical Analyst Rob Ginsberg’s excellent work on the space.
Our WR Banks & Brokers Index was up +2% WoW, outpacing the gains in both the S&P 500 (+1%) and S&P Fins. (+1%). The biggest laggards this week were WFC (flat) and BK (flat), with Wells lagging following the announcement of CEO Tim Sloan’s retirement. The outperformers this week were RJF (+5%), ETFC (+3%), SF ( +3%), and EVR (+3%), which we attribute to optimism surrounding favorable 1Q earnings setup for RJF and ETFC in particular (see our preview). YTD trends remain less encouraging as our WR Bank / Broker index (+10%) continues to lag the broader market (+13%), with SF (+27%), EVR (+27%), and Citi (+20%) still atop the leaderboard, whereas LAZ (-2%), AMTD (+2%), and SCHW, (+3%) remain at the bottom of the pack.
After the close (3/28/19), the Fed released documents providing additional information on CCAR models, consistent with the Fed’s earlier announcement that it will begin to improve transparency on the stress test process (see prior press release). Included with the documents was the summary of other model changes that the Fed is implementing for this year’s exam which is provided annually. We have noted in prior years that this is always the most interesting part of these documents and allows for the most actionable calls, because it is 1) filled with useful information on PPNR / loan loss expectations for the coming stress test, and 2) very often missed by investors because it is usually tucked away somewhere that is not very noticeable (this year they are in Appendix A).
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss what the street is missing, profitability targets (what Godlman can deliver on ROE, EPS, and efficiency), and sizing 1MDB risk (why we're more optimistic on GS' prospects).
GS shares have lagged peers and remains a consensus underweight. Lukewarm interest from investors stems from concerns on secular FICC pressures, execution risk tied to newer growth initiatives, and 1MDB legal risk. We recently hosted a meeting with GS mgmt., including CFO Scherr, and Co-Head of Investment Mgmt., Tim O’Neill. Takeaways from the meetings reinforced our belief that the investment community is focusing on the wrong areas and that much of the future earnings upside should come from levers within the firm’s control (funding, efficiency, capital). We really like the setup for GS given a low cons. bar (we are +4% above for 2020) and attractive valuation (cheapest among peers on both P/E and P/TBV); profitability targets (slated to be unveiled later this year) should also make the case for sustained mid-teens EPS growth beyond 2020 which is not in cons. We also believe there is lots of confusion surrounding 1MDB risk which we address in greater detail in this report.
1Q has been a bit of a roller coaster ride. The initial setup was looking good for stock-pickers, as our WR Bank & Broker Index meaningfully outperformed out of the gate with significant performance dispersion across the group. But as we got deeper into 1Q, investor optimism started to wane as revenue cracks emerged: IB activity stalled due to the government shutdown; trading failed to keep pace with tough year-ago comps; and a more dovish Fed weighed on NIM expectations. Even the strong equity market rally prompted mixed feedback as this resulted in significant declines in higher-yielding client cash. Following the strong start to 2019, the banks / brokers have since erased those early gains, prompting the all-important question…
Just a brutal week for our WR Banks & Brokers Index which meaningfully underperformed (-6% WoW), tracking well behind the S&P 500 (-1%) and the S&P Fins. (-5%). The biggest laggards this week were AMTD (-10%), ETFC (-8%), SCHW (-8%), BAC (-8%), and LPLA (-8%) as the Fed’s dovish remarks weighed disproportionately on more asset sensitive financials. Following this week’s selloff YTD performance for the WR Bank / Broker index (+8%) is now lagging the broader market (+12%), and while the leaderboard remains largely the same, including SF (+24%), EVR (+23%), and Citi (+17%), the bottom of the pack has changed somewhat and now includes some of the eBrokers (AMTD +2%, SCHW +1%), in addition to LAZ (-3%).
Our WR Banks & Brokers Index rebounded nicely this week (+320bps WoW), tracking slightly ahead of the S&P 500 (~290bps) and the S&P Fins. (~300bps). Share performance across the group was strong, with NTRS (+6%), Citi (+5%), MS (+5%), and ETFC (+5%), and SCHW (+5%) the top performers, while AMTD (+1%), GS (+1%), LAZ (+1%), and EVR (+2%) the notable laggards. WR top performers YTD remain SF (+34%), EVR (+26%), and Citi (+25%), reflecting strong 4Q18 results and positive EPS momentum, with LAZ (-2%), MS (+9%), and SCHW (+9%) still underperforming following mixed 4Q18 results / conservative earnings guidance.