We are downgrading WFC to UP (from PP). WFC is a stock with significant potential for value creation down the road, but over the next 12-18 months, we see less attractive risk / reward vs. Money Center (MC) peers given: 1) Limited offset to lower rates due to weaker deposit growth and less help from Mortgage; 2) Richer valuation and greater negative revision risk vs. Money Center peers (we are -8% below for 2020); 3) Lack of efficiency progress in Wealth, Wholesale (vs. targets); and 4) Capital return narrative is less differentiated. Despite lagging Money Center peers by ~2,000bps YTD, we continue to see room for further underperformance as our updated PT implies -2% downside to shares (vs. +9% on average at MC peers), justifying our downgrade to Underperform.
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Investors myopically focused on 2Q results are not seeing the forest for the trees as the biggest question on investors’ minds is how the changing rate landscape will impact future earnings for 2020 (and beyond). Unfortunately assessing the impact of lower rates cannot be done in a vacuum as equity market levels, capital markets activity, retail cash levels, and credit losses will vary significantly under different macro scenarios. Given these complicating factors, we refined our previous late-cycle scenario analysis (see 2019 Outlook) and introduce three new scenarios to better capture the changing rate landscape: 1) Bull Case (insurance cut, market melt-up); 2) Base Case (3 cuts by mid-2020, choppy markets); and 3) Bear Case (garden variety recession incl. 6 cuts, 30% market correction, spike in credit losses).
This week our Diversified Banks & Brokers Index was up (+2%), tracking in line with the S&P 500 and S&P Fins. Within our coverage, the dispersion was fairly limited in a holiday shortened week. The best performers were NTRS (+4%), LPLA (+3%), ETFC (+3%), and AMTD (+3%), and the biggest laggards (which didn’t even lag all that much) were WFC, BAC, MS, STT, BK, RJF, SF, EVR, and LAZ which all posted (+1%) share performance. Looking at YTD trends, our top three performers remain SF (+44%), LPLA (+38%), and C (+37%) with BK (-5%), LAZ (-6%), and STT (-10%) rounding out the bottom three.
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a Goldman Sachs deep dive webcast, covering topics including higher ROTCE targets, growth initiative, capital/efficiency, revenue pushback, and more.
We recently had the opportunity to meet with GS CEO David Solomon, and Head of IR Heather Miner. Following our previous deep dive analyzing underappreciated “self-help” levers, the meeting afforded us the opportunity to dig into some of the newer growth initiatives, including its more aggressive platform buildout in Alternatives and Corporate Cash Management. While some of these newer initiatives will take time to scale and will require some degree of investor patience, our analysis shows this will be worth the wait, with an incremental ~150bps ROTCE potential above and beyond our previous target of 13-14% (and that’s before these new initiatives are fully scaled). ROTCE potential of ~15% supports a bull case valuation of >$350, or >70% upside to the current price. With shares trading near TBV, we see no better risk / reward opportunity within our coverage. Key meeting highlights:
This week our Diversified Banks & Brokers Index was up (+1%) WoW tracking in line with the S&P Fins. and outperforming the S&P 500 by 100bps. Our index received a generous bump from the G-SIBs performance on Friday (+2% on average) following no objection from the Fed across the board on capital return plans. We outline the firms which surprise positively versus consensus payout estimates in our 2019 CCAR Results note and on slide 4. SF (+5%), GS (+4%), and NTRS (+4%) were the best performers this week while ETFC (-4%) and LAZ (-4%) lagged. The YTD leaderboard remains consistent with SF (+43%), C (+35%) and LPLA (+34%) the best performers and BK (-6%), LAZ (-7%), and STT (-11%) the biggest laggards.
The Fed released 2019 CACR results after market close, with all US banks receiving approvals for their 2019 capital plans. Each firm also announced planned capital actions for 3Q19-2Q20 (dividend + gross repurchase). Bottom line: GS, JPM, BAC, NTRS and BK were the clear winners this year, with these firms announcing the biggest positive surprises vs. consensus payout expectations (Ex. 1-2). In particular we were very encouraged by GS results as the firm announced $8.8bn of total capital return authorization, or 96% of cons. earnings, affirming our expectation that the firm should be able to payout >100% of earnings over time, well above street expectations. The relative disappointments were COF and USB (not covered) where announced payouts came in below cons. We would expect shares across the Universal and Trust Banks to react well tomorrow, with GS likely outperforming.
This week our WR Banks & Brokers Index was flat WoW, in line with the S&P Fins. with both lagging the S&P 500 by 200bps. We received a healthy amount of inbound on the relative outperformance from LAZ (+6%) and underperformance at LPLA (-4%) this week. We dug into these names and provide insight to this weeks performance and outlook heading into 2Q print on slides 9-10. The YTD leaderboard remains largely consistent with SF +36%, LPLA +32%, and C +31% continuing to outperform our coverage and STT -12%, BK -8%, and LAZ -3% remaining our bottom three.
The Fed published 2019 DFAST results this afternoon. Results were extremely positive, with all firms remaining well above minimum capital and leverage requirements (see Ex. 7 for a summary of results). Bottom line: Our DFAST screen (see file here) suggests that payouts for the US G-SIBs are poised to move higher, with the greatest room for positive surprise at NTRS, GS and STT relative to cons. Estimated stress capital buffers (SCBs) also came down across all the US G-SIBs, with our estimates suggesting the firms remain in strong excess capital positions even under the future SCB regime. Given these positive results, we would expect the entire group to react well on Monday.