ETFC reported 2Q19 EPS of $0.90; ex. losses related to balance sheet repositioning and provision benefit, core EPS was $1.12, vs. our est. of $1.08 and cons. of $1.09. Vs. our forecast, beat was driven by higher NII (+$0.03) and service charges & fees (+$0.03), partially offset by higher expenses (-$0.03). See page 2 for detailed variance. Bottom line: Despite some investor concerns on mixed 2Q trends, we would note that weaker organic growth was partially driven by more pronounced tax pressures, and there is some impact on expenses from 2Q seasonality. We are also very encouraged by ETFC’s decision to reposition the balance sheet which should provide a nice lift to earnings (note: we have been advocating for this strategy for some time; see recent Weekly Chu). We raised our 2020E forecast to reflect lower sharecount; PT to $54 (from $53); Maintain Outperform.
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SCHW reported 2Q19 core EPS of $0.65 (ex ~$0.01 gain from sale of Portfolio Center), above our est. of $0.63 and in line with cons. of $0.65. Versus consensus, revenues (excluding the gain) were slightly weaker on lower NII (-$.01), partially offset by lower expenses (+$.01), though 2Q NII and EPS did exceed our own forecast. See pg. 2 for our detailed EPS variance summary. Bottom Line: While SCHW results were somewhat mixed in 2Q, we sense that this is one of the more crowded shorts heading into 2Q earnings season, with June cash trends inflecting positively following disappointing May metrics. While we continue to see risk to 2020 cons. with rate cuts / client sorting pressures not adequately reflected in street numbers, given recent share underperformance and more resilient cash trends in June, we could see modest outperformance off the back of these results.
This week our Diversified Banks & Brokers Index was flat, tracking in line with the S&P Fins. with both lagging the S&P 500 (+1%). Our relative outperformers this week were GS (+3%) and LAZ (+3%). We are not surprised with GS’ outperformance as we are seeing investors warm up to our call (see our deep dive note). The biggest laggards were the Trust Banks as STT (-3%), NTRS (-3%), and BK (-2%) underperformed our coverage. YTD trends remain consistent, with SF (+45%), LPLA (+39%), and C (+38%) top three performers. STT (-12%), BK (-7%), and LAZ (-3%) round out the bottom three.
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.
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.
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.
Investors appear to be growing increasingly frustrated with RJF stock which has meaningfully lagged peers YTD (+11%, vs. SF +36% / LPLA +35%) with recent discussions suggesting many are bracing for an underwhelming Investor Day update. Bottom Line: We like the setup for RJF into Investor Day largely because the bar for management appears very low, and the stock has not seen its typical pre-Investor Day bump (see pg. 9). When adjusting for excess capital, RJF is the cheapest among the brokers (~9x adjusted NTM P/E), suggesting that any commitment from management to return some amount of excess capital, defend its high-teens op. margin, flex deposit costs in a Fed easing cycle, or any similar shareholder-friendly actions should garner a favorable reaction, as the stock has much ground to cover vs. the peer group. We explore each of these potential areas in much greater detail in the report. Summary highlights:
This week our WR Banks & Brokers Index was down -1% WoW, lagging the S&P 500 and S&P Fins. by 100bps. C (+3%) and BAC (+2%) were our relative outperformers, with Citi benefitting from WoW estimate revisions (+1%). STT (-2%) saw estimates revise down by -3% following guidance on NII, and it joins the eBrokers (-3%) as our relative laggards following disappointing monthly metrics. LPLA (+37%), SF (+37%), and C (+30%) continue to outperform the rest of our coverage YTD, while STT (-12%), LAZ (-9%), and BK (-5%) remain our worst performers.
We recently hosted meetings with SF CEO Ron Kruszewski, CFO Jim Marischen, and Head of IR Joel Jeffrey. Topics of discussion focused on macro outlook (particularly rates), positioning within Institutional / Wealth Management, expense flexibility, and capital management priorities. Bottom line: Despite an elevated cons. bar following strong YTD revisions (+13% for 2020), we came away from our meeting more constructive on SF shares as management was confident in its ability to defend their operating margin even in the face rate pressures, with stronger recruitment and healthy IB backlogs supporting a higher target multiple. And while shares have meaningfully outperformed YTD (+37%, vs. S&P Fins. +14%), with shares trading near post-crisis trough and a discount vs. both the market and peers, we see compelling risk / reward. Our PT of $65 implies +15% upside; Maintain Outperform.
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