1、North America Equity Research07 May 2019Trust Banks:Post 1QNon-Int Bear Deposits Down to 2011-13 Levels;Deposits/AUC to 2009;Equity vs F/X Mkts Near TermBanks Large-CapVivek Juneja AC(1-212)622-Bloomberg JPMA JUNEJA Jonathan Summitt(1-212)622-Andrew J Dietrich(1-212)622-J.P.Morgan Securities LLCSee
2、page 28 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should co
3、nsider this report as only a single factor in making their investment decision.Looking post 1Q,key takeaways:1)near term,trust banks are likely to see mixed trends in two key risks,cyclical and market risk likely continued pressure on deposits and hence net interest margins(NIM),but mixed market tre
4、nds good benefit to revenues from recent strong market appreciation but lower F/X trading revenues if trends persist;2)medium term,net interest income growth will be driven by stabilization and growth of core deposits,although some trust banks are trying to grow higher cost wholesale deposits;and 3)
5、secular pressures continue in servicing and asset management,but more intensely in certain client segments,hence pressure varies by trust bank.All the trust banks continue to cut costs and do large buybacks these are the two key positive drivers.They have embarked on strategies for front office that
6、 are divergent but also similar in some aspects.Trust banks lagged traditional banks very sharply in 1Q19 on all metrics:core revenues,PPP,and EPS due to impact of marketsand rates.Trust bank stocks have lagged traditional banks and the market sharply both recently and year to date.Trust bank valuat
7、ions are below their long term averages,but concerns about equity market valuations and continued pricing declines are likely to keep them pressured medium term.Next catalyst is CCAR,which should be a positive for trust banks due to continued high capital return.Strong equity markets should offset w
8、eak F/X market trends and boost servicing and asset management fees.Daily average,monthly average,and period end indices in US,Europe,and EM rose 1%-17%qoq in 1Q and 1%-9%qoq in 2Q.However,F/X volatility is down 8%-19%yoy,and F/X volumes are down 12%-19%yoy.Non-interest bearing deposits in 1Q19 have
9、 fallen to 2011-2013 levels in absolute dollar amounts and down to 2008-10 levels as percentage of total deposits for all trust banks.In addition,average total deposits in 1Q are down to 2013-15 levels at the trust banks.State Street grew wholesale deposits to invest in MBS,and plans to do more to i
10、ncrease revenues and add fixed rate assets this is likely to be a low spread business.State Street and Northern reduced sensitivity to rate cuts in 1Q and STT is also more positive to changes in non-USD currencies.See pages 12-15.Operating margin down at all trust banks but greater drop at BoNY by 4
11、50bp yoy in 1Q19 despite more reduction in expenses than peers.This implies greater revenue pressure at BoNY.See Tables 12-13.Front office strategies divergent and similar among trust banks.State Street is in the front office business as it acquired front office system provider CRD.BoNY and Northern
12、 have chosen to build linkages and capabilities for straight through processing and reconciliations with many front office providers.Recently,State Street shifted and also plans to provide capabilities for linking its clients to other front office systems.State Street is also investing further in CR
13、Ds capabilities.State Street has seen growth in servicing assets in only the mutual fund segment(+14%yoy in 1Q19)the other three segments declined yoy,down especially sharply in insurance and alternatives,partly due to business loss in several segments.Mutual funds are seeing the biggest outflows an
14、d pricing pressure.See Table 8.Trust banks lagged traditional banks very sharply in 1Q on all metrics growth in revenues,PPP,and EPS due to the weakness in markets and pricing pressures.The markets impact should partly reverse in 2Q.$4.5 bil leveraged loans at State Street at 3/31 these represent ab
15、out 19%of loans,3%of earning assets.2North America Equity Research07 May 2019Vivek Juneja(1-212)622-Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateBank of New York Mellon Corp.BK US47,234.3149.33UWn/c50.00Dec-1950.50n/cNorthern TrustN
16、TRS US21,506.4998.80Nn/c105.50Dec-19104.50n/cState StreetSTT US25,082.0766.58Nn/c74.00Dec-1975.50n/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 06 May 19.3North America Equity Research07 May 2019Vivek Juneja(1-212)622-Updating EstimatesWe are updating EPS estima
17、tes to reflect market trends and recent management guidance.1Q results were marked by:1)declines in servicing and asset management fees;2)significant decreases in net interest income and lower net interest margins at Bank of New York and State Street;3)lower F/X trading and securities lending revenu
18、es yoy;4)controlled expenses with cost cuts;and 5)sizable share buybacks.We expect share buybacks to be the key driver of EPS growth in 2020.Table 1:EPS Estimate Changes$2019E2020E1Q19NewOldChangeNewOldChangeBK0.94 3.984.13(0.15)4.354.50(0.15)NTRS 1.53 6.866.72 0.14 7.537.38 0.15 STT 1.22 6.556.74(0
19、.19)7.407.55(0.15)Source:Company reports and J.P.Morgan estimates.Table 2:Key EPS Drivers at Trust BanksMedian non-FTE yoy growth2016201720182019E2020ENet Interest Income4%15%14%1%0%Non-Interest Income1%4%7%-2%2%Revenue1%5%9%-2%2%Expenses0%6%8%0%2%Reported Net Income7%12%15%-9%4%Reported EPS11%12%19
20、%-6%10%Operating EPS11%14%22%0%10%Source:Company reports and J.P.Morgan estimates.4North America Equity Research07 May 2019Vivek Juneja(1-212)622-Profitability Down In 1Q;Trust Metrics Lag Traditional Banks Due To Market WeaknessProfitability was down yoy for Bank of New York and State Street in 1Q
21、across all three metrics:core revenue growth,core pre-provision profit(PPP),and core EPS.Northern Trust saw modest 0.3%yoy revenue growth,but PPP and EPS were both down yoy.All metrics for the trust banks were hurt primarily by lagged impact of the sharp downturn in markets,plus weakness in net inte
22、rest income at two of the three trust banks Bank of New York and State Street.Table 3:Revenues Down YoY at BoNY,State Street,Flattish at Northern Trust Core revenueQoQ ChgYoY Chg1Q193Q184Q181Q1920182019EBK-2.7%1.7%-0.7%-7.7%3.8%-3.3%NTRS-1.9%9.9%5.3%0.3%10.8%1.9%STT-3.5%6.1%5.8%-4.3%8.6%-1.7%Median-
23、2.7%6.1%5.3%-4.3%8.6%-1.7%Traditional Bank Median-1.0%3.7%2.5%3.3%3.4%2.4%Source:Company reports and J.P.Morgan estimates.Table 4:While PPP Was Down 18%-19%at BoNY,State Street Core pre-provision profitQoQ ChgYoY Chg1Q193Q184Q181Q1920182019EBK-6.9%0.9%-3.1%-19.4%6.6%-10.1%NTRS-4.8%14.8%5.9%-5.9%17.3
24、%1.6%STT-23.6%4.1%-4.8%-18.4%8.3%-6.6%Median-6.9%4.1%-3.1%-18.4%8.3%-6.6%Traditional Bank Median-5.1%6.5%6.7%6.5%7.1%5.3%Source:Company reports and J.P.Morgan estimates.Table 5:Core EPS Down Very Sharply at State Street and BoNYCore EPSQoQ ChgYoY Chg1Q191Q192019EBK-5.2%-17.4%-6.1%NTRS-9.2%-4.3%4.3%S
25、TT-27.0%-24.3%-13.9%Median-9.2%-17.4%-6.1%Traditional Bank Median-5.7%7.7%7.9%Source:Company reports and J.P.Morgan estimates.5North America Equity Research07 May 2019Vivek Juneja(1-212)622-State Streets Servicing Fees Much Weaker Than PeersServicing fees have softened at all trust banks over past c
26、ouple of quarters due to weak markets and pricing pressure.State Streets servicing fees much weaker than peers;down 6.2%yoy and 12%yoy in 4Q18 and 1Q19 respectively due to its client mix and greater share of equities in its asset class mix.Northern Trust had much faster servicing fee growth in 2018
27、than peers,but it also saw a sharp slowdown to modest growth in the past two quarters.Servicing fees should pick up in 2Q due to the lagged effect of sharp recovery in markets.In addition,there have been inflows into EM funds,which carry much higher fees.Servicing fees account for a much higher 45%o
28、f total revenues at State Street versus 25%-27%at peers.Table 6:Northern Trust Greater Decline in AUCA in 2018 But Better Recovery in 1Q19Period end AUC/AQoQ ChgYoY ChgAUC/A1Q19($bil)1Q182Q183Q184Q181Q192018BK 0.6%0.3%2.7%-4.1%4.2%-0.6%34,500NTRS(1)0.6%-0.7%1.1%-6.5%7.9%-5.6%10,927STT0.5%1.8%0.4%-7.
29、0%3.2%-4.5%32,643Median0.6%0.3%1.1%-6.5%4.2%-4.5%Source:Company reports and J.P.Morgan calculations.(1)Note,NTRS AUCA includes assets for both C&IS and Wealth Management segments.Table 7:However,Northern Trust Outperformed Peers in 2018 and 1Q19 in Servicing Fee GrowthServicing feesQoQ ChgYoY ChgSer
30、vicing Fees/Total RevenueServicing Fees 1Q19($bil)3Q184Q181Q193Q184Q1820181Q19BK 0.3%-2.0%-0.5%3.9%-0.2%4.6%-3.8%27%1,078NTRS(1)-0.5%0.3%-0.2%10.8%1.8%11.8%0.3%25%375STT-3.5%-2.9%-3.3%-1.3%-6.2%1.2%-12.0%45%1,251Median-0.5%-2.0%-0.5%3.9%-0.2%4.6%-3.8%31%Source:Company reports and J.P.Morgan calculat
31、ions.(1)Note,NTRS servicing fees are for C&IS segment only.6North America Equity Research07 May 2019Vivek Juneja(1-212)622-Mutual Funds STTs Largest Segment;Segment Has Grown,Offsetting Declines In OthersState Street has seen differing trends in various client segments mutual fund segment was the on
32、ly one that grew yoy in 1Q19,up 14.4%to$8.6 tril.The other segments all declined.It is impressive to see such strong growth in light of industry outflows to ETFs this likely reflects some new business wins.However,mutual funds are seeing greater pricing pressure.This segment accounted for 26%of Stat
33、e Streets$32.6 tril in AUCA at March 31,2019.Insurance and other(including alternatives)segment declined the most,down 10.6%yoy.Hence,State Street is increasing focus on these segments.Table 8:State Street Saw Growth in Mutual Fund Segment but Declines in All OthersPeriod end AUCA by client type,$bi
34、lPeriod End AUCAChange 1Q19 YoY4Q164Q171Q184Q181Q19Mutual Funds6,8417,6037,5037,9128,58614.4%Collective Funds&ETFs7,5019,7079,9088,9999,436-4.8%Pension Products5,5846,7046,8026,4896,513-4.2%Insurance&Other8,8459,1059,0718,2208,108-10.6%Total AUCA28,77133,11933,28431,62032,643-1.9%Source:Company data
35、.7North America Equity Research07 May 2019Vivek Juneja(1-212)622-Asset Mgmt Fees Down Sharply,Mainly Due To Weak Markets Plus Pricing PressureAsset management fees also fell in the past two quarters at all trust banks.Decline was primarily due to the impact of weak markets,and also pricing pressure.
36、Assets under management rose strongly in 1Q,mainly due to strong equity markets and sizable inflows at State Street.Table 9:Assets Under Mgmt Declined at All Trust Banks in 3 of 4 Quarters in 2018,Then Rebounded Strongly in 1Q19,Primarily From Higher MarketsPeriod end AUMQoQ ChgYoY ChgAUM 1Q19($bil)
37、1Q182Q183Q184Q181Q192018BK-1.3%-3.4%1.3%-5.8%6.9%-9.0%1,841NTRS-1.8%-0.4%3.0%-9.7%9.7%-8.9%703STT-2.9%-0.2%4.5%-10.9%11.4%-9.7%2,407Median-1.8%-0.4%3.0%-9.7%9.7%-9.0%Source:Company reports and J.P.Morgan calculations.Table 10:Asset Management Fees Were Down More Sharply YoY in 1Q19Asset management f
38、eesQoQ ChgYoY ChgManagement Fees/Total RevenueManagement Fees 1Q19($bil)3Q184Q181Q193Q184Q1820181Q19BK 1.2%-3.1%-4.9%1.2%-8.1%1.8%-11.5%22%841NTRS(1)-3.9%-3.1%-0.9%4.2%-1.0%8.3%-4.9%7%104STT(2)1.9%-7.2%-4.5%1.2%-6.7%2.8%-11.0%15%420Median1.2%-3.1%-4.5%1.2%-6.7%2.8%-11.0%22%NTRS WM Fees1.9%0.0%-1.2%8
39、.6%5.8%9.0%0.1%26%394Source:Company reports and J.P.Morgan calculations.(1)NTRS asset management fees only includes investment management fees in C&IS.(2)3Q18,4Q18,and 2018 yoy changes are adjusted for accounting change.8North America Equity Research07 May 2019Vivek Juneja(1-212)622-Strong Equity Ma
40、rkets Are Continuing In 2Q;Servicing,Asset Mgmt Fees To BenefitEquity markets have continued to recover on period end basis in 2Q,with US indices up 3%-5%qoq and non-US indices up 1%-5%qoq.Equity indices are up sharply by 4%-9%qoq on daily average basis in 2Q,reflecting the rebound in markets from 1
41、Q.Equity markets are also strong on month end average basis,up 3%-8%qoq.EM markets,which have significantly higher servicing fee rates,are up in 1Q but not as strongly EM index is up 2%qoq on period end basis,5%on daily average basis,and 3%on month end average basis.Servicing and asset management fe
42、es should benefit in 2Q from the rebound in markets as some fees are based on asset values with a month or quarter lag or are based on daily average values.Table 11:Equity Markets Up Solidly in 2Q,With Most Indices Up Sharply on Daily/Monthly Average BasisQoQ change,as of May 6,2018Period EndDaily A
43、vgMonth End Avg4Q181Q192Q194Q181Q192Q194Q181Q192Q19S&P 500-14.0%13.1%3.5%-5.3%0.8%6.9%-7.6%4.3%5.9%Nasdaq-17.5%16.5%5.1%-8.4%1.8%9.1%-10.7%6.0%7.9%Russell 2000-20.5%14.2%4.9%-11.7%0.7%4.4%-14.0%5.0%4.2%Russell 3000-14.7%13.5%3.6%-6.1%1.1%6.7%-8.3%4.7%5.8%FTSE 100-10.4%8.2%1.4%-7.4%1.0%5.1%-8.2%2.3%4
44、.1%EuroStoxx 50-11.7%11.7%3.3%-7.6%1.5%8.0%-9.2%4.7%5.9%MSCI EAFE-12.9%9.0%2.3%-7.8%1.3%4.5%-10.0%4.4%3.2%MSCI EM-7.8%9.6%2.3%-7.1%5.7%4.9%-8.6%8.3%2.7%Nikkei-17.0%6.0%5.0%-3.1%-4.5%5.1%-7.6%-1.4%5.4%JPM Bond Index1.7%3.1%-0.1%-0.4%3.0%1.7%-0.1%3.2%1.3%CDX IG(bp chg)28-24-613-5-918-14-6CDX HY(bp chg
45、)119-102-2559-24-3676-56-25Source:Bloomberg and J.P.Morgan calculations.9North America Equity Research07 May 2019Vivek Juneja(1-212)622-Operating Margin Down At All Trust Banks,Bank Of New York Down MostOperating margins are down at all trust banks yoy,hurt by the weakness in markets from 4Q,pricing
46、 pressures,and a decline in net interest income yoy at Bank of New York.Bank of New York saw the largest decline in operating margin by 450bp yoy in 1Q,followed by State Street at 360bp yoy,and then Northern Trust at 210bp yoy.This was despite Bank of New York seeing the largest decline in non-inter
47、est expenses among the trust banks.Hence the greater weakness in operating margin at Bank of New York is likely due to weaker revenues.All trust banks are investing in technology to boost digitization/automation and to cut costs.Table 12:Operating Margins Down YoY,Most at Bank of New York Core opera
48、ting margin2016201720181Q184Q181Q19YoY Chg 1Q19BK31.2%32.7%33.9%35.3%32.2%30.8%(450)bpNTRS31.0%31.8%33.7%33.8%33.0%31.7%(210)bpSTT29.4%28.4%28.8%25.8%28.0%22.3%(360)bpMedian31.0%31.8%33.7%33.8%32.2%30.8%(360)bpSource:Company reports and J.P.Morgan estimates.Table 13:Despite Having Cut More Expenses
49、Than PeersYoY change in core expenses20183Q184Q181Q19BK1.9%1.3%-0.2%-1.5%NTRS(1)6.9%7.2%4.6%3.4%STT(1)4.4%1.7%5.4%0.1%Median4.4%1.7%4.6%0.1%Source:Company reports and J.P.Morgan estimates.(1)NTRS,STT adjusted for impact of revenue recognition accounting change.10North America Equity Research07 May 2
50、019Vivek Juneja(1-212)622-F/X Volatility,Volumes Both Down Sharply In 2QAverage F/X volatility is down sharply in 2Q to date,with G-7 worse but EM also down:G-7 is down 19%qoq and yoy,and EM is down 6%-8%qoq and yoy.F/X trading volumes also appear weak in 2Q F/X derivative contract volumes are down
