With conference season kicking off this week, we wanted to share a few files that we thought might be helpful. The first is our Question Bank, which includes both company specific and general questions for all of the firms in our coverage presenting and/or participating in 1x1s. We also included some Guidance Tearsheets which compare our modeled forecasts to each piece of company guidance in an easy-to-read format. Please feel free to use us as a resource in case you need anything ahead of your meetings.
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The Fed published assumptions for 2019 CCAR scenarios after the market close (2/5/19), though this year the release excluded CCAR Instructions which are typically published at the same time. For the 2019 Severely Adverse scenario (which dictates capital targets for individual firms), the Fed does contemplate a more severe recession including a steeper decline in GDP, and a higher spike in unemployment. That said, other aspects of the test appear less severe compared with prior exams, including a more benign equity / credit market selloff (+ for GS, MS, STT), and a less severe rate / OCI shock (+ for STT, BK, BAC; Ex. 5-6). While there are no clear negative outliers among the individual banks, the Fed did highlight a more cautious view on international (both Europe and Developing Asia), which coupled with a higher spike in unemployment (implying higher Card losses), may pose a greater threat to Citi.
This week our WR Diversified Banks & Brokers Index was up +10bps, trailing the broader market (+160bps) but tracking largely in line with the S&P Fins. (+10bps). We saw meaningful dispersion in terms of share performance as the Retail Brokers and M&A firms were powered by strong 4Q results / favorable guidance, with LPLA (+7%) and EVR (+6%) clear standouts. The biggest laggards this week were the asset sensitive banks and capital markets firms, including BAC (-4%) and MS (-3%). While bank / broker shares took a breather this week, YTD performance has been strong, particularly at those firms which underperformed by a wider margin in 4Q18 but reported strong results including EVR (+26%), LPLA (+23%), and Citi (+22%), while mixed 4Q results have weighed on performance at JPM (+6%), WFC (+6%) and MS (+5%).
This week our WR Diversified Banks & Brokers Index was down modestly (-30bps), largely in line with the S&P Fins. (flat) and the broader market (-20bps). Share trends over the last week were quite bifurcated, with STT (+2%), AMTD (+2%), Citi (+1%), and BAC (+1%) the relative winners and ETFC (-6%), EVR (-2%), and MS (-2%) the laggards. That said, YTD performance remains quite strong, with our index outpacing the S&P 500 by ~700bps. Citi (+23%), BAC (+20%) and GS (+20%) have been clear winners so far, while LAZ (+5%), JPM (+6%), and MS (+8%) have been the relative laggards. As we approach the end of 4Q earnings season, we wanted to highlight some key debates on select stocks:
This week our WR Diversified Banks & Brokers Index was up +7%, slightly outpacing the S&P Fins. (+6%) but tracking well ahead of the broader market (+3%). The move higher was led by broad-based strength across the group, with GS (+14%), BAC (+13%), Citi (+11%), and BK (+10%) the clear winners following encouraging 4Q results / commentary. Relative laggards over the last week were WFC (+4%), JPM (+5%), and MS (+5%).
Following 4Q earnings for the Universal & Trust Banks (with the exception of NTRS which reports Jan. 23), we remain constructive on the Money Centers / Universal Brokers, where we see upside to cons. (ex. WFC, where we are below primarily on fee income) and valuations remain attractive. We remain cautious on the Trusts, particularly BK and STT, where we see meaningful downside risk to cons., especially for STT, given disappointing guidance on fee income growth in 2019. For a summary of estimate and PT changes post-earnings, please see page 2.
GS reported 4Q18 EPS of $6.04 vs. our est. of $3.86 and cons. of $4.30. Adjusting for a lower tax rate (+$0.89) and a ~$516mn litigation charge related to 1MDB (~$1.08), core EPS was ~$6.23, vs. our “core” estimate of $5.44. Vs. our forecast, the beat was driven primarily by stronger revenues in I&L (+$0.63 on an apple-to-apple basis incl. provision) with strength in Equity, stronger IB (+$0.22), and lower comp accrual (+$0.85). This was partially offset by higher non-comp (excluding litigation; -$0.50), and weaker trading (-$0.44), as well as other items. See pg. 2 for our earnings variance sheet. Bottom-line: While core beat highlighted strong expense discipline and continued strong momentum in IB, weaker trading results and questions surrounding sustainability of strong I&L gains could dampen share outperformance. Large litigation reserve build was largely anticipated, but we expect CEO Solomon to get many questions on the impact of 1MDB / sizing the potential liability.
This week our WR Diversified Banks & Brokers Index was up +2.7%, slightly outpacing the broader market (+2.5%) and tracking ahead of the S&P Fins. (+1%). The move higher was led by the Regional Brokers (+7%), with the M&A Independents (+1%) and Universal Brokers (+1%) lagging the rest of the group.
This week our WR Diversified Banks & Brokers Index was up +4%, outpacing S&P Fins. (+3%) and the broader market (+2%). The move higher was led by the Universal brokers (+6%) and M&A Independents (+6%), with the Trusts (+2%) and Regional Brokers (+2%) lagging the rest of the group. The big stock winner this week was EVR (+8%) which benefited from winning the Bristol / Celgene advisory mandate (~$20mm fee, per Dealogic).
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