Fed Governor Lael Brainard noted in a CNBC interview that she is becoming more concerned on economic growth, and that in her view, the process of Fed balance sheet normalization “should probably come to an end later this year”. If the Fed stops asset run-off by year-end 2019, this would be sooner than expected, and should provide some relief on deposit flight / migration risk at the Trust Banks relative to our current forecasts. However, even if we assume deposit pressures begin to abate in 2020, we still believe cons. interest-earning asset (IEA) and NII forecasts remain too aggressive.
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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.
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:
NTRS reported 4Q18 EPS of $1.80; adjusting for lower tax rate (~$0.15), core EPS was $1.65, slightly ahead of our $1.62 and cons. of $1.64. Versus our forecast, the beat was driven by higher NII (+$0.01) helped by higher asset yield as deposit beta (72%) came in above our expectation. Fees also came in above, helped by stronger FX trading (+$0.01) and Other Income (+$0.01). Bottom Line: While core results for the quarter were solid, we are wary of negative flow through from lower AUM (-9% QoQ), higher deposit beta (72%, vs. 56% in 3Q18), and continued noninterest-bearing deposit declines (-1% QoQ). While shares have lagged the peer group YTD (~300bps underperformance vs. BK / STT), our early read suggests little room for upward revisions, and we expect share reaction to be fairly muted.
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%).
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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