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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%).

BAC announced this morning (1/30/19) that it is extending commission-free online stock and ETF trades to all Preferred Rewards program members beginning in 2Q19 (previously available to clients in higher tiers only). The announcement drove eBroker shares down -2% (vs. -50bps S&P Fins.) as investors feared this could drive SCHW or Fidelity to announce commission cuts in retaliation, or otherwise negatively impact market shares across the group. However, we would view this as an attractive buying opportunity as history suggests underperformance should be temporary, with little lasting impacts on market share. This is particularly true for ETFC, as post-earnings share underperformance has continued; we still view risk / reward as compelling as our analysis of high-ROE bank peers suggests ETFC should be trading near ~13.5-14x NTM P/E vs. ~11x currently (Ex. 4).

ETFC reported 4Q18 of $1.07, vs. our $1.05 and cons. of $1.03. Vs our est., beat was driven by lower comp (+$0.03), provision (+$0.03), and sharecount (+$0.01), offset by weaker NII (-$0.02) and higher non-comp (-$0.03). Bottom line: ETFC results were the weakest so far, as we expected earnings resiliency in a down equity market which did not show through (client cash levels lower than expected despite meaningful declines in margin balances). We expect shares to underperform tomorrow, with results also likely to drive renewed calls for strategic actions. But while we acknowledge 4Q was discouraging, we would also note that one quarter does not an investment thesis break. Recall there were two key components to our investment case: 1) Earnings resiliency; and 2) Operating margin expansion. While the first of these did not materialize, mgmt. reiterated op. margin guidance for 2019-20 even without rate help. In our view, this, coupled with encouraging NIM guidance (320bps for 2019) still supports modest upside to cons. With shares at ~12x our 2019E (and trading down -4.5% after-market), we are staying the course, though acknowledge that from here the thesis becomes more of a “show me” story. For eBroker comparative trends, please see page 2.

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%).