JPM (+): Core EPS of $2.59 (ex gain on loan sales) came in well above our estimate of $2.49, and cons. of $2.45.
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It’s that time again… We are once again heading into earnings, with C, JPM, WFC, GS, and SCHW kicking things off on Tuesday (10/13/19) (thanks a lot, guys). In last week’s Chu, we highlighted feedback on our big bank earnings preview, and this week we are focusing on the latest feedback on the Brokers, particularly ETFC. There were two key sources of inbound from investors this week. The first is ETFC game theory, where we unpack some of the assumptions in our merger models and quantify the takeout probability that is currently priced in. Following our upgrade of BK, we continue to have significant inbound on what Fed balance sheet growth could mean BK deposit / earning asset growth, and whether the other Trust Banks stand to benefit here as well. With early speculation suggesting the Fed balance sheet could grow as much as $500bn (>10%) over the next twelve months, our sensitivity analysis suggests the impact to earnings could be meaningful (see slide 6).
This week was incredibly busy with the majority of our client inbound focused on the eBrokers and the impact of zero commissions. In this week’s Chu we address three key questions pertaining to the price war debate, including: 1) what’s priced into the eBroker stocks; 2) updated thoughts on eBroker multiples following this week’s price cuts; and 3) where we see the most compelling investment opportunities given this week’s price action.
We updated our estimates to reflect mark-to-market for flatter yield curve (including July, Sept. rate cuts), slower loan growth (per Fed H8 data), and softer IB / trading. While the quarterly indicators were not all bad (higher equity markets, robust mortgage banking, strong debt issuance), our mark-to-market of various indicators implies a tougher setup for the brokers (-10% below), and mixed setup for Money Centers (flat) and Trusts (+1% above).
There was a lot of news flow this week and price volatility across our coverage was much more elevated than usual, but three stories really dominated the headlines: 1) Charlie Scharf leaving BK to take the reins at Wells Fargo; 2) Elizabeth Warren’s recent surge in the polls (and implications for our coverage); and 3) Interactive Brokers launching a free stock / ETF offering. This week we spend some time digging into all three, providing some perspective on Scharf’s performance at BK and implications for WFC, and share some of our own views on his appointment, as well as feedback from investors. We also address recent inbound on Elizabeth Warren and identify those firms that are most at risk from her becoming the nominee. Lastly we provide some updated views on the eBrokers following the IBKR announcement this past week including detailed investor feedback.
eBroker shares sold off today following IBKR’s announcement that it would be launching a new platform called IBKR Lite which would offer free trading of US Equities / ETFs (note: this excludes Derivatives). The market has shrugged off recent free trade announcements (e.g. SQ, BAC) but IBKR is admittedly a different animal given it is a leading player in the retail brokerage space, and this effort to expand beyond the active trade cohort (likely in response to Robinhood) has reignited fears of another price war. Following today’s release the eBrokers meaningfully lagged, AMTD (-7%) and ETFC (-5%) in particular. While some investors argued similar announcements in the past have had little impact on trading revenue / market share, history tells us that eBroker shares may take time to recover, and we would wait for the storm to pass before legging in.
This week we discuss key takeaways from our recent financials dinner, a collaborative effort with Wolfe’s Top Portfolio Strategist and closet bank geek Chris Senyek. Specifically we identify one topic where the attendees collectively agreed the market (and even managements) appears too complacent, as well as some of the more popular long / short ideas coming out of the dinner. We’ve also had a significant pickup in inbound this week on the Trusts following some recent stress in the repo market and Fed rhetoric on balance sheet growth (and possibly even QE4?). In this week’s Chu we provide some detailed historical analysis to help frame how the prospect of QE4 might impact deposit growth at the Trusts.
This week was a busy one for both us and investors, with plenty of company presentations, headlines, and management meetings. In this iteration of the Weekly Chu, we provide some perspective around eBroker share performance following a recent announcement from Square that it is testing free trades, as well as our thoughts regarding recent headlines that SCHW will be cutting 3% of its workforce. This week we hosted three separate sets of investor meetings (with management teams at Morgan Stanley, LPL, and Evercore); while we will be publishing more in depth thoughts in the coming days, in our Weekly today we run through first thoughts following the meetings and where we heard most positive client feedback. Lastly, we would encourage clients to check out the webcast on the Momentum Crash that our excellent QES team hosted last week, which walks investors through the recent moves in momentum and value factor investing.
This week we are looking ahead to conference season with a few things to help you prepare. First we published our updated Question Bank with a refreshed list of the top questions we have for each company that is presenting or hosting 1x1s next week – see our Question Bank, and a table of supporting materials (model, summary of management guidance) below. Next, we’ve had a lot of inbound on our thoughts on the Trust Banks, so we wanted to discuss how we think about the setup for these stocks into the conference and earnings. Also, we know with the long weekend last week, some investors may have missed it, so we wanted to re-highlight some interesting analyses on trading NII and why we think BAC, C and JPM could surprise positively even in a falling rate environment.
Conference season is upon us. To help investors prepare for company presentations / 1x1 meetings, we have updated our question bank, which includes a list of our top questions for each company.
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