With news flow a bit quieter this week and our buy side counterparts still digesting some remaining prints, we took the opportunity ahead of our upcoming Wolfe FinTech Forum (March 10th – 11th) to put together tearsheets for all of our participating companies, including synopses of the c-suite presenters, business / performance trends, key areas of investor debate, and what we aim to learn from each session. We didn’t intend for things to work out this way, but we will be hosting 1v1 (signup here) and group meetings with eight firms representing ~25% of the $45 trillion US Retail / Wealth Management TAM (BAC, UBS, MS, GS, RJF, LPLA, ETFC and SF). That’s to say the conference will be an excellent one-stop shop for those looking to dig into the competitive dynamics of the space and drill down on topics such as FA recruiting / breakaway brokers, pricing and rate sensitivity.
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Tougher Scenarios for Brokers (GS, MS) and Card Issuers (C, COF) on More Severe Credit Selloff, CLO Stress, and Jump in Unemployment. The Fed published its assumptions for 2020 CCAR scenarios after the market close. For this year’s Severely Adverse scenario (which dictates capital targets for individual banks), the Fed contemplates a more a more pronounced spike in the unemployment rate, a severe credit market selloff (negative for GS, MS), and higher stress on CLO and PE exposures in the Global Market Shock (negative for WFC, GS). Otherwise, the test appears in-line to less severe relative to prior cycles, including a less severe rate / OCI shock and curve steepening (positive for Trusts, BAC). The Fed did highlight a more cautious view on international (both Developing Asia and EM), which coupled with a higher spike in unemployment (implying higher Card losses), may pose a greater threat to Citi (Ex. 7).
49ers or the Chiefs? I’m a firm believer in the tried and true mantra of offense wins games, defense wins championships, and am leaning towards the 49ers here though don’t have strong allegiance to either team. Admittedly I will be much more focused on the scoring as I just received my boxes for the game – this year serves as a healthy reminder for why I should stop participating in such activities (2 & 2… remember that time a team scored 4 field goals and the other had a safety, and that was the extent of the scoring? Yea me neither).
GS hosted its first ever Investor Day today and shares underperformed the tape (-1% vs. flat S&P Fins.) as a result of perceived reliance on revenue growth to support intermediate and long-term targets – however, we are much more constructive as the bulk of the earnings upside / path to mid-teens ROTE stems from “self-help” initiatives, namely efficiency improvement and funding optimization (Page 3). Bottom line: Despite investor skepticism on revenue growth targets (particularly in growth initiatives e.g., Alternatives, Transaction Banking, and Consumer), near-term efficiency improvement alone should support 10% upside to cons. Meanwhile, a clearer path to mid-teens ROTE (Ex. 1-2) that’s largely self-help reliant (>70% of targeted improvement) should boost the stock’s valuation over the intermediate term.
Investor Day Slides Outline Path to ~60% Efficiency; Mid-Teens ROTCE. GS is hosting its first ever Investor Day today. In the slide presentation (published earlier this morning), the firm outlines a five-year ROTE target of mid-teens or better. In addition, GS also gave intermediate targets (3 years), including ~60% efficiency, >14% ROTE, and 13-13.5% CET1. Bottom line: In a recent Bull / Bear lunch we hosted, the key concern cited among investors was that GS would disappoint by not providing intermediate targets (as longer-term targets are tougher to underwrite). This presentation should dispel such concerns, particularly as near-term targets support 10% upside to cons. Despite strong performance YTD (+6% vs. S&P Fins. -2%) and a raised bar heading into Investor Day, we believe these targets should be sufficient to drive further outperformance. We will follow up with more detailed thoughts this evening post the event. Maintain O/P, with our first blush reinforcing GS as one of our Top Picks for 2020.
Earnings season is close to wrapping up for our coverage with only a few stragglers remaining: LPLA, SF, LAZ, and EVR. Thus far the price action has been pretty interesting – Universal brokers have emerged as the big winners with MS and GS leading in terms of performance (+9% and +7%, respectively), with the Money Centers bring up the rear (-4%). This has been a pretty challenging earnings season – positioning has been fairly treacherous with disappointing expense guides resulting in pretty dramatic selloffs at BK and WFC last week; with RJF, NTRS, and ETFC also getting caught up in expense-driven weakness this week.
Happy MLK weekend and hope you’re managing OK so far this earnings season. This morning (1/19/20) we published our Universal Bank and Trust wrap which should be in your inbox - in addition to our usual detailed data comparative (which includes the Regional banks too) we spent some more time exploring key stock debates around some of the more controversial names coming out of 4Q earnings. We felt this was important given the sheer amount of inbound we received this week (>4x what we would typically expect during G-SIB earnings). The pickup in inbound wasn’t too surprising as share price dispersion has been pretty significant out of the gate, with some names already posting >9% gains (GS, MS), whereas a handful are tracking down >7% (BK, WFC)... pretty unusual for the G-SIBs.
The Universal & Trust banks wrapped up earnings this week (with the exception of NTRS). Biggest winners were MS, STT and GS, as strong results and well-executed earnings calls / strategic updates were received very well by investors. On the other end of the spectrum, WFC and BK were the underperformers as weaker results (WFC) and disappointing expense guide (BK) weighed. Our take: Post earnings we remain bullish on the Universal Brokers (GS and MS), and despite strong performance out of the gate (+10% YTD vs. 1% S&P Fins.), we still see a strong case for owning shares. We also remain quite constructive on the Trust banks despite BK’s disappointing expense guide, as our positive view on NII / deposit growth and strong capital return remains intact (see 2020 Outlook). We are still cautious on Money Centers, particularly for WFC where near-term earnings expectations remain too high; with the exception of Citi, we expect little to no PTI expansion for the group in 2020.
GS (+): Noisy Qtr. – Core EPS (adjusting for “normal litigation” of $150mm, 21% tax rate) came in at $6.49, still ahead of our $5.94 and cons. of $5.47. Versus our estimate, the beat was all on the top-line (+$1.84), helped by very strong results across both trading and Equity Investments / Lending. This was largely offset by higher expenses, including a large litigation reserve (likely for 1MDB), and still higher comp (-$0.34), non-comp (-$0.83), and provision (-$0.21). See pg.2 for our detailed variance sheet. Bottom line: We expect some investors will nitpick sustainability of revenue strength given outsized contributions from Equity Investments / FICC, as well as continued upward pressure on costs, provision. Our take is more constructive, as we believe front-loading of investments and higher litigation accrual positions the firm well to drive improved efficiency / returns in 2020 and beyond. Further, these actions resulted in limited capital drag despite >$2B of buyback in 4Q (CET1 of 13.3%, versus 13.6% in 3Q). We continue to see a clear path to mid-teens ROTCE through-the-cycle, and with shares trading at 1.2x TBV, we still see risk / reward as compelling. Maintain Outperform.
Everyone’s back in the saddle, chips have been placed, and the typical deluge of sell side outlooks have hit. So what’s changed and what have we learned? Well for one, it seems that investors have come back quite engaged and we’ve been fortunate to receive an abundance of feedback on our 2020 Outlook and stock calls – hearing from both the bulls and the bears. In this note, we go subsector-by-subsector and company-by-company sharing color from our initial week of conversations. We also outline how these dialogues and clear shifts in sentiment/positioning (e.g. GS, JPM) inform our “refreshed takes” on the stocks.
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