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GS reported 1Q19 EPS of $5.71 vs. our est. of $4.75 and cons. of $4.89. Adjusting for a lower tax rate, core EPS was ~$5.38. Vs. our forecast, the beat was driven primarily by stronger revenues in IB (+$0.33), I&L (+$0.11), FICC trading (+$0.07), and lower efficiency primarily driven by comp (+$0.40) partially offset by lower Incentive fees (-$0.13), softer Equities trading (-$0.03) and modestly higher provision (-$0.07) / sharecount (-$0.05). See pg. 2 for our earnings variance sheet. Bottom-line: While naysayers will cite revenue miss (vs. cons.) which could weigh on shares today, GS results disappointed in lower-quality areas (I&L, Incentive fees) with other segment results in line to slightly better. More importantly, GS demonstrated meaningful expense discipline, which is a core tenet of our bull case (see GS deep dive).
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.
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss what GS may be on the hook for (fine, restitution, forfeiture), sizing cumulative 1MDB liability/settlement, navigating multiple jurisdictions in settlement talks, and tail risks: DOJ leverage over Goldman in any negotiation.
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).
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to discuss what the street is missing, profitability targets (what Godlman can deliver on ROE, EPS, and efficiency), and sizing 1MDB risk (why we're more optimistic on GS' prospects).
GS shares have lagged peers and remains a consensus underweight. Lukewarm interest from investors stems from concerns on secular FICC pressures, execution risk tied to newer growth initiatives, and 1MDB legal risk. We recently hosted a meeting with GS mgmt., including CFO Scherr, and Co-Head of Investment Mgmt., Tim O’Neill. Takeaways from the meetings reinforced our belief that the investment community is focusing on the wrong areas and that much of the future earnings upside should come from levers within the firm’s control (funding, efficiency, capital). We really like the setup for GS given a low cons. bar (we are +4% above for 2020) and attractive valuation (cheapest among peers on both P/E and P/TBV); profitability targets (slated to be unveiled later this year) should also make the case for sustained mid-teens EPS growth beyond 2020 which is not in cons. We also believe there is lots of confusion surrounding 1MDB risk which we address in greater detail in this report.
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…
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