1Q19 Earnings Recap: NTRS the Clear Standout but Still Cautious on the Trusts. STT and NTRS closed out Trust Bank earnings today, with both firms reporting headline EPS beats vs. cons. However, core trends and messaging differed materially, with STT disappointing on guidance for both fees and NII; whereas NTRS gave more constructive guidance on both revenues and expenses. The divergence in the day’s share performance (NTRS +4%, STT -4% vs. S&P Fins. +1%) makes sense in the context of our 2019E / 2020E estimate revisions (NTRS +6-7%, STT -2%); based on our updated forecasts, NTRS is the lone Trust bank that will not post earnings declines (YoY), reinforcing our view that “flat is the new up” for the Trusts. While NTRS surprised positively vs. peers, looking across a broad swathe of Regional and Money Center banks, results were less impressive, reinforcing our preference for the Money Centers (BAC, C, JPM) where both revenue and efficiency trends, as well as balance sheet metrics, are tracking better. For a detailed look at our Income and Balance Sheet comparative, please review pgs. 7-9.
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NTRS reported 1Q19 EPS of $1.48; adjusting for higher severance, core EPS was $1.52, slightly ahead of our estimate and cons. of $1.47. Versus our forecast, the beat was driven primarily by stronger fees across both Custody (+$0.02) and Wealth Management (+$0.02), which also drove better efficiency (+$0.02), partially offset by weaker FX trading (-$0.01), and a slightly higher tax rate (-$0.01) See pg. 2 for detailed variance. Bottom Line: NTRS delivered solid results in a tough quarter, as fee trends were better than expected, and management did a good job of controlling expenses. Deposit trends were also (relatively) better – while liability balances came slightly in below our forecasts (average deposits down -2%, non-interest bearing down -7%), deposit repricing trends were much better than expected (+7bps QoQ, vs. BK +13bps and STT +15bps). We would expect shares to outperform given stronger results at NTRS versus Trust peers, but remain wary of NII guidance given continued deposit declines and high NII bar implied by current cons.
STT reported 1Q19 EPS (ex-items) of $1.24, in line with our $1.24, and ahead of cons. of $1.19. Versus our estimate, revenues came in slightly above on higher processing fee income (+$0.01, which included the benefit of a tax-advantaged lease sale), with core efficiency (ex. restructuring and related costs) in line, partially offset by a higher provision (-$0.01). See pg. 2 for detailed variance (ex-items). Bottom Line: While STT shares have outperformed peers in recent weeks (MTD +460bps ahead of NTRS, +1060bps ahead of BK), these results demonstrated greater EPS resiliency. Following a string of disappointing prints at STT the past few quarters, these results are more encouraging, and should drive modest outperformance. The lone area of concern we will be looking out for is NII / deposit guidance as avg. noninterest-bearing deposits declined -12% QoQ (total deposits -2%) which could negatively impact NII guidance. We look forward to additional color on the call this morning (04/23/19).
This week our WR Banks & Brokers Index was up +2% WoW, outpacing the S&P 500 by 100bps but lagging the S&P Fins. (+3%). After a week packed with earnings, the clear winners, namely JPM (+8%), Citi (+6%), and MS (+6%), were firms that either absolutely crushed earnings or outlined a clear path to delivering meaningful long-term shareholder value. BK (-5%) and WFC (-2%) suffered from lackluster core results and disappointing outlook commentary, with NTRS (-3%) rounding out the bottom three as shares traded in sympathy following BK’s tough 1Q print. Looking at YTD trends, no change to our top three performers in SF (+43%), Citi (+34%) and EVR (+31%), but there was a slight shakeup among the bottom three, with BK (+3%) joining fellow laggards WFC (+3%) and LAZ (+2%).
BK reported a 1Q19 miss this morning, and weaker-than-expected results, along with disappointing guidance on the conference call sent shares tumbling (closing down -9.5% vs. S&P Fin. flat). 1Q19 results reinforced multiple tenets of our negative thesis for the Trust Banks, including fee income pressures, persistent declines in deposits / NII (which we have highlighted since our Sep. initiation), and limited expense flexibility, with key trends lagging peers (Ex. 5-13). In addition to 1Q NII miss, management guided to 2Q NII down 3-5% QoQ; looking beyond 2Q, if deposit costs continue to increase (given mgmt. commentary that competition continues to intensify) and asset yields are unchanged, with limited growth in balances, we believe NII declines should be sustained through at least the remainder of 2019. Even if we assume greater expense flexibility and continued sharecount declines / robust capital return, pressure on both NII and fee income suggests cons. EPS is still 6-7% too high. Weaker revenue momentum should also impact the multiple which, relative to STT / NTRS, has climbed to near post-crisis peak levels (Ex. 3-4). Updated PT of $46 implies -5% downside shares; maintain Underperform as BK remains our preferred short among the Trusts.
Impressive 1Q Revenue Beat in Choppy Tape; Shares, Cons. Heading Higher. MS reported 1Q19 EPS of $1.39, well above our est. of $1.19 and cons. of $1.17; adjusting for a lower tax rate, core EPS was ~$1.28. Versus our estimate, the revenue beat (+$0.08) was broad-based, with the biggest contributors FICC (+$0.04), Wealth Management fee income (+$0.03), and Investment Mgmt. fees (+$0.03), which more than offset modestly weaker Equities (-$0.01) and IB (-$0.01). See pg. 2 for our earnings variance sheet. Bottom-Line: MS shares have outperformed the broader market following results at peers (~240bps outperformance since earnings season kicked off on Apr. 11th), but we expect continued follow-through as results showcased broad-based strength in a difficult revenue environment, with cons. likely heading higher as well. Valuation also looks very compelling with the firm delivering core ROTCE of ~14% (vs. <1.3x TBV). Maintain Outperform.
1Q Miss as NII Pressures Continue; Shares, Cons. Heading Lower. BK reported 1Q19 EPS of $0.94, below our $0.98 and cons. of $0.96. Adjusting for a lower tax rate ($1.01), core EPS was closer to $0.93. Versus our estimate, the core miss was driven by weaker NII (-$0.01), lower management fees (-$0.01), and higher efficiency ratio (-$0.02), though absolute dollars of expense came in below our est. Bottom Line: These results reinforce top-line challenges for the Trusts with both NII and fee income down high-single-digit % YoY, with NII headwinds exacerbated by non-interest-bearing deposit declines (-7% QoQ, -23% YoY). This has been a key driver of our cautious thesis on the group, and even with the better market backdrop in 1Q (which should help 2Q19 results), we struggle to see a path to achieving management’s goal of delivering EPS growth in 2019 (adjusted basis), with these results likely to weigh on shares / prompt negative revisions.
BAC reported a modest beat in 1Q19 (see note), but shares sold off pre-market and underperformed peers by ~180bps, as 2019 NII guidance fell short of consensus, with lower expense accrual in 1Q19 also limiting flexibility for the remainder of the year. While early feedback from investors suggests the selloff was justified given as much as ~$0.10 (or 3%) downside to current consensus, even when we adjust our model to reflect updated guidance items, we still believe 2019 / 2020 consensus is doable (Ex. 3). While this quarter’s results were nothing to write home about, we see a number of reasons for optimism, including strong deposit growth / YoY share gains (see Ex. 9), expense discipline, favorable credit trends, and best-in-class capital return potential. Looking beyond 2019, we see a clear path to mid-to-upper teens ROTCE (vs. 1.6x TBV currently), supporting our $34 PT and +14% upside. Maintain Outperform Rating.
BAC reported 1Q19 EPS of $0.70 vs. cons. and our estimate of $0.66. Excluding the impact of lower tax rate (~$0.02), core EPS came in at ~$0.68. Vs. our estimate, the core beat was driven largely by lower expense (-$0.02), with core NII slightly better, and fee income a touch light. Loan growth was a bit soft (+1% YoY), but core loan growth came in better (+4% YoY), with favorable deposit repricing (+9bps QoQ) a key offset, and NII / NIM beating street expectations. See pg. 2 for our detailed variance sheet. Bottom-Line: We expected the reaction following these results to be fairly muted as revenues missed cons. and headline loan growth was a bit soft. That said, given the challenging operating backdrop, this was a good enough result in an admittedly challenging quarter, and still showcased BAC’s ability to deliver mid-teens ROTCE (~16%) and positive operating leverage (revenues flat YoY, expenses down 4%) in a difficult environment.
Citi reported strong results for 1Q19 (see note), with shares outperforming Money Center peers by ~50bps following the print. Management gave detailed guidance for FY19 across revenue (both NII and fee income), expense, and other items (see below); we see room for meaningful upward revisions to consensus with guidance implying as much as ~4% upside to current street estimates for 2019 (we are 2% above). Valuation is also quite compelling with shares trading at a <5% premium to TBV, versus 12% ROTCE potential in 2019, and mid-teens longer term. Our updated PT of $77 (up from $75) implies +14% upside to the current share price, supporting our Outperform rating.
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