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.
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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.
This week our WR Banks & Brokers Index was up +2% WoW, outpacing the S&P 500 by 100bps but tracking largely in line with the S&P Fins. (~2%), with clear winner JPM (+6%) boosted by an impressive FY1Q19 print. BAC (+4%), MS (+4%) and STT (+4%) were the other notable outperformers, with BAC / MS benefiting from the positive readacross from JPM earnings (see first look). WFC was the notable laggard this week (-5%) following a weak core print and more conservative NII growth outlook (see slide 4), with NTRS (-1%) and EVR (+1%) rounding out the rest of the bottom three. Looking at the YTD leaderboard, SF (+42%), EVR (+33%) and Citi (+30%) remain at the top, with WFC (+1%), LAZ (+5%) and SCHW (+9%) rounding out the bottom three.
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).
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.
Our WR Banks & Brokers Index was down ~430bps WoW, tracking below the S&P (-220bps) and the S&P Fins. (-270bps). Share performance was quite weak, with ETFC (-7%), SCHW (-7%), STT (-6%), and LPLA (-6%) the clear laggards, while WFC (-1%), JPM (-1%), and GS (-1%) shares held in better than the rest of our coverage. Despite the disappointing week, YTD performance remains strong as top performers including SF (+28%), EVR (+23%), and Citi (+19%) continue to be buoyed by strong 4Q18 results, with LAZ (-3%), MS (+4%), and SCHW (+5%) still underperforming following mixed 4Q18 results / conservative earnings guidance.
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