1、North America Equity Research09 July 2019Large Cap Banks 2Q PreviewModest 2Q Hurt By NIM;Divergent Signals From MarketsBanks 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 page 37 for analyst certification
2、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 consider this report as only a singl
3、e factor in making their investment decision.We expect weak 2Q results,hurt primarily by the flatter yield curve plus mixed comps for capital markets-related revenues.Key issue in 2Q is the economic outlook and what banks are seeing among their customers,especially the impact of tariffs and trade wa
4、rs.Signals from markets are diverging:treasury yields are down sharply,indicating concerns about slowdown,but equity and markets are holding up.Credit spreads have been choppy but ended 2Q without much change,and equity markets are up.In our view,this may imply that the markets do not expect a mater
5、ial slowdown,and hence,manageable,even if there are a couple of Fed rate cuts,and the drivers of rate cuts seem to be driven more by political factors.We expect large banks earnings will be hurt a little by Fed rate cuts,but a modest downturn should be very manageable as large banks have strong capi
6、tal positions and underwriting standards are tighter than before prior downturns.That said,some banks may have less ability to moderate the impact of Fed rate cuts.As a result of this dichotomy,banks guidance may vary assome may not incorporate rate cuts into their base case but instead give sensiti
7、vities.We expect large bank stocks to be range bound near term due to political uncertainty.Large bank stocks recovered recently after CCAR 2019 and good employment data,which lowered expectations a tad for rate cuts.Banks raiseddividends in CCAR 2019,and dividend yields are attractive.Valuations re
8、main attractive Money Centers are trading at 9.4x 2020 EPS on average,below 9.9x long term avg,and Regionals are at 10.1x 2020 EPS,below 11.4x avg.Near term,we recommend PNC and Citizens.Medium term,we continue to like banks with non-macro drivers,such as Citi and PNC.Given uncertainty about rate cu
9、ts,could add a more rate sensitive bank Bank of America,but key is expense outlook.Key 2Q drivers:1)lower net interest margins due to flatter yield curve;2)modest loan growth(Fed weekly data muddied in 2Q);3)mixed capital markets revenues investment banking and trading down,but asset management up;4
10、)pickup in mortgage banking;5)seasonal rise in some fee income categories;and 6)continued good credit quality.Institutional leveraged loan growth slowed sharply.Weekly Fed loan growth data muddied in 2Q at large banks by reconstitution,impacting consumer loans,notably credit cards.We expect modest o
11、verall loan growth.Higher refis boosted other loans and residential mortgages in the Fed data.Deposit costs likely to rise further but at a slower pace.Banks are cutting deposit rates,but:1)rates on new money are still above existing deposit costs;and 2)shift from non-interest bearing deposits into
12、interest bearing is slower but continuing.Expect banks will be less able to lower deposit costs than in last rate cut cyclebecause they have:1)lower share of higher rate deposits(e.g.,CDs,money market deposits);and 2)higher share of non-interest bearing deposits.Retail deposit costs did not go up ma
13、terially this rate hike cycle.Mortgage banking revenue likely to rise in 2Q and rise more in 3Q from higher refis.This will boost origination revenues,but servicing revenue will partly offsetdue to weaker net MSR hedging results and higher MSR amortization expense.Despite higher IPOs,investment bank
14、ing fees are down,falling in most areas.Announced M&A volumes remained strong June was 3rdbest month since crisis.Trading revenues are also down due to lower volatility and tough comps.Selected Recent Reports:Mortgage Banking:Benefit In 2Q,3Q From Spike In Refis But Partial Offset From Servicing,dat
15、ed July 2,2019CCAR 2019:Dividends Up Solidly;Total Capital Return Up Most At PNC,Followed By Northern Trust And BofA,dated June 28,20192North America Equity Research09 July 2019Vivek Juneja(1-212)622-Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd Dat
16、ePrevEnd DateBank of AmericaBAC US279,397.0029.20OWn/c29.50Dec-1930.50n/cBB&T CorporationBBT US37,828.7949.39Nn/c50.50Dec-1951.50n/cCitigroup Inc.C US164,488.1071.13OWn/c77.00Dec-1975.00n/cCitizens Financial GroupCFG US16,415.7635.60OWn/c40.50Dec-1941.50n/cFifth Third BancorpFITB US20,747.7328.06Nn/
17、c30.00Dec-1930.50n/cPNC FinancialPNC US64,177.44140.74OWn/c142.00Dec-19137.50n/cRegions FinancialRF US15,326.6915.13OWn/c17.00Dec-1917.50n/cSunTrust Banks,Inc.STI US28,189.0963.53OWn/c64.50Dec-1967.00n/cU.S.BancorpUSB US84,906.9053.10UWn/c52.50Dec-1951.00n/cWells FargoWFC US214,450.6047.53UWn/c47.50
18、Dec-1948.50n/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 08 Jul 19.3North America Equity Research09 July 2019Vivek Juneja(1-212)622-Mixed 2Q EPS;Cutting Estimates To Reflect Rate CutsWe expect 2Q earnings to be marked by:1)modest loan growth;2)modest rise in ne
19、t interest income on average,but moderate decline in net interest margins(NIM)due to decline in both short term and long term rates;3)some rebound in non-interest income rise in mortgage banking and asset/wealth management due to the market rebound,and some seasonal increases in card fees and deposi
20、t service charges,partly offset by weakness in trading and investment banking;4)expenses up a tad qoq,but down seasonally at some;5)continued good credit quality,but higher provisions;and 6)continued capital return.Adjusting estimates to reflect:1)one Fed rate cut in September 2019 and one in Decemb
21、er 2019;2)trends in fixed income and equity markets;and 3)company news and guidance.Wells Fargos reported 2Q EPS is up due to gains from another sale of pick-a-pay mortgages.Table 1:EPS Estimate Changes$per share2Q19E2019E2020ENewOldChangeNewOldChangeNewOldChangeBAC 0.70 0.70-2.76 2.81(0.05)2.96 3.0
22、7(0.11)BBT 1.09 1.09-4.28 4.35(0.07)4.67 4.80(0.13)C1.84 1.86(0.02)7.53 7.57(0.04)8.55 8.60(0.05)CFG0.96 0.96-3.86 3.91(0.05)4.10 4.20(0.10)FITB 0.66 0.66-2.77 2.78(0.01)2.98 3.04(0.06)PNC 2.81 2.81-11.22 11.22-11.85 11.96(0.11)RF0.38 0.39(0.01)1.53 1.56(0.03)1.64 1.70(0.06)STI1.46 1.48(0.02)5.80 5.
23、86(0.06)5.98 6.22(0.24)USB1.05 1.05-4.22 4.24(0.02)4.44 4.50(0.06)WFC1.24 1.14 0.10 4.75 4.75-4.85 5.10(0.25)Source:J.P.Morgan estimates.4North America Equity Research09 July 2019Vivek Juneja(1-212)622-Fed Loan Data Muddied:Other Loans Up Sharply,Most Consumer Loan Categories UpTotal loans at large
24、banks rose 2.0%qoq(+4.5%yoy)on period end basis through June 26thper Fed data,but trends weremuddied by reconstitution of the large banks group.QoQ trends were led by sharp growth in other loans likely boosted by growth in mortgage warehouse loans due to sharp jump in refis.Other consumer loans were
25、 also up strongly qoq and yoy.Reported credit card loan growth is muddy for 1Q and 2Q we expect much more modest organic credit card loan growth than reported growth due to the reconstitution noted above.C&I loans were up modestly by 0.5%qoq(+7.2%yoy),potentially due to a weaker M&A environment.Howe
26、ver,C&I plus other loans rose 1.7%qoq(+7.6%yoy)as all other loans grew 4.5%qoq,led by mortgage warehouse loans.Residential mortgages up strongly by 1.7%qoq,likely the result of mortgage pipeline growth from the pickup in refi originations these loans will be securitized into MBS.We expect average lo
27、an growth trends to be mixed at our banks slower qoq growth at some banks(from loan sales at some),but growth up at BB&T,US Bancorp,Citi,and PNC,with latter two driven by good period end C&I growth in 1Q.Table 2:Weekly Fed Loan Data Muddied;2Q Led by Sharp Growth in Other Loans,Other Consumer,and Re
28、sidential MortgagesLarge Banks period end growth,adjusted for M&A,as of June 26,2019,NSAAmount($bil)QoQ ChgYoY Chg2Q183Q184Q181Q19(1)2Q192Q183Q184Q181Q19(1)2Q19(1)C&I1,301.41.9%0.1%6.1%0.5%0.5%3.5%4.3%9.3%8.7%7.2%Other(2)847.61.6%0.6%6.2%-2.1%3.5%7.0%5.0%7.7%6.2%8.3%Loans to Non-Bank Financial Firms
29、349.25.1%5.2%7.9%0.0%2.2%14.7%15.0%19.1%19.2%15.9%All Other498.3-0.6%-2.3%5.1%-3.4%4.5%2.6%-0.8%1.0%-1.5%3.6%C&I Plus All Other2,149.01.8%0.3%6.1%-0.5%1.7%4.9%4.6%8.7%7.7%7.6%CRE 701.41.7%-0.7%0.0%-0.1%-0.1%1.0%0.4%0.6%1.0%-0.8%Resi Mtge 1,189.70.2%0.7%-0.5%-0.4%1.7%2.6%2.3%0.4%0.1%1.5%Home Equity 2
30、17.4-3.4%-2.7%-2.3%-3.5%-2.7%-11.8%-12.0%-11.8%-11.3%-10.8%Cards665.42.8%-1.1%5.5%-0.4%7.5%5.1%2.0%1.3%6.9%11.8%Auto356.50.1%0.5%0.1%0.8%2.3%1.9%0.9%0.4%1.5%3.7%Other Consumer124.42.2%3.1%2.1%1.3%4.4%4.7%5.9%8.4%9.1%11.5%Total Loans(3)5,403.71.2%0.0%2.9%-0.4%2.0%2.7%2.1%3.2%3.7%4.5%Source:Federal Re
31、serve and J.P.Morgan calculations.(1)1Q19 qoq/yoy&2Q19 yoy adjusted for M&A.(2)Other is the sum of Loans to Non-Depository Financial Institutions and All Other.(3)Excludes Fed Funds sold and reverse repos.Table 3:Loan Growth at Our Banks Will Likely Be MixedAverage total loan growthQoQ ChgYoY Chg4Q1
32、81Q19(1)2Q19E2019EBAC0.4%1.0%0.6%2.4%BBT0.9%0.4%1.6%4.4%C0.8%0.6%1.4%3.9%CFG1.7%1.5%0.2%4.4%FITB(ex MBFI)1.6%1.7%NANAPNC1.2%1.2%2.4%4.8%RF1.1%2.3%0.9%4.7%STI2.5%3.0%1.2%8.0%USB0.9%0.9%1.1%3.6%WFC0.7%0.4%0.0%1.0%Median0.9%1.0%1.1%4.4%Source:Company reports and J.P.Morgan estimates.FITB is adjusted to
33、 exclude impact from its acquisition of MBFI.5North America Equity Research09 July 2019Vivek Juneja(1-212)622-Institutional Leveraged Loan Growth Slowed Further In 2QInstitutional leveraged loan growth slowed further in 2Q to 1.3%,after slowing down a little in 1Q19.Some of this slowdown may be due
34、to continued outflows from leveraged loan mutual funds.In addition,growth in leveraged loans is likely being hurt by investors shifting back to high yield bonds,now that the Fed is no longer raising rates.Figure 2:Leveraged Loan Growth Slowed Sharply to 1.3%QoQ in 2Q QoQ change,institutional leverag
35、ed loans outstandingSource:S&P Global Market Intelligence(LCD).As of July 8,2019.Figure 3:Growth in May and June Was Stronger than April but Slower than Prior YearMoM change,institutional leveraged loans outstandingSource:S&P Global Market Intelligence(LCD).As of July 8,2019.-0.5%5.6%1.4%1.8%3.6%5.5
36、%4.3%5.3%3.0%1.3%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%1Q172Q173Q174Q171Q182Q183Q184Q181Q192Q191.6%1.8%2.0%1.7%1.0%0.3%-0.2%0.7%0.7%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%Apr 18 May 18 June 18Jan 19 Feb 19 Mar 19Apr 19 May 19 June 19Figure 1:Institutional Leveraged Loans Up 13.8%YoY to$1.194 TrilInstituti
37、onal leveraged loans outstanding,$bilSource:S&P Global Market Intelligence(LCD).$-$200$400$600$800$1,000$1,200$1,40001/0411/0710/1108/1507/19July 8,2019:$1.194 trilYoY Growth:13.8%6North America Equity Research09 July 2019Vivek Juneja(1-212)622-Period End Deposits Up Modestly;Securities Up StronglyD
38、eposits rose modestly by 0.6%qoq through June 26thon period end basis per Fed weekly data.Average deposits were better at+1.5%qoq.Securities were up strongly by 3.1%qoq on period end basis and are up moderately by 1.5%qoq on average basis.Average growth in 3Q will benefit from the strong period end
39、growth in 2Q growth was seen in all categories,little faster in treasuries and agency MBS.Reported securities growth in 2Q should be a little higher from unrealized gains resulting from the decline in interest rates.Figure 4:Deposits Up Modestly by 0.6%QoQ on Period End Basis,Up Moderately by 1.5%on
40、 Average BasisLarge Banks deposit QoQ growth,NSASource:Federal Reserve and J.P.Morgan calculations.Data through June 26,2019.Average is of weekly figures.1Q19 is adjusted for M&A.Figure 5:Period End Securities Up Strongly by 3.1%QoQLarge Banks securities(ex unrealized g/l)QoQ growth,NSASource:Federa
41、l Reserve and J.P.Morgan calculations.Data through June 26,2019.Average is of weekly figures.1Q19 is adjusted for M&A.0.2%1.0%1.6%0.5%1.5%-0.7%1.0%3.9%-0.5%0.6%-1.5%-0.5%0.5%1.5%2.5%3.5%4.5%2Q183Q184Q181Q192Q19AveragePeriod End0.2%1.0%1.6%1.6%1.5%0.9%0.8%3.2%0.6%3.1%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%2
42、Q183Q184Q181Q192Q19AveragePeriod End7North America Equity Research09 July 2019Vivek Juneja(1-212)622-NIM Likely Down Moderately In 2Q And To Fall Further With Rate CutsWe expect net interest margins(NIM)to decline moderately by 5bp qoq on average in 2Q,partly driven by a modest decline in 1 month Li
43、bor,which determines commercial loan yields,and the sharp drops in medium term and long term ratesseen year to date,which should drive MBS premium amortization expense higher and hurt reinvestment yields.We expect NIM to continue to trend downward in 2019 and 2020,with our expectation for two Fed ra
44、te cuts and a flatyield curve.Table 4:Expect NIMs To Fall Moderately in 2Q FTE net interest marginQoQ Chg1Q19 NIM4Q181Q192Q19EBAC 7 bp(1)bp(5)bp2.51%BBT 2 bp2 bp(6)bp3.51%C1 bp1 bp1 bp2.72%CFG3 bp-(3)bp3.25%FITB(1)6 bp(2)bpNA3.27%PNC(3)bp2 bp(3)bp2.98%RF5 bp(2)bp(7)bp3.53%STI-(5)bp3.27%USB-1 bp(3)bp
45、3.16%WFC-(3)bp(7)bp2.91%Median(ex-FITB)1 bp-(5)bp3.16%Source:Company reports and J.P.Morgan estimates.(1)FITB 1Q19 NIM and QoQ change is on standalone basis ex-MBFI.Table 5:And NIM to Decline Further in 2H19 and 2020 if Fed Cuts RatesFTE net interest marginYoY Chg201720182019E2020EBAC 15 bp6 bp(3)bp
46、(12)bpBBT 7 bp0 bp(4)bp(14)bpC(15)bp(4)bp2 bp(1)bpCFG20 bp16 bp(3)bp(8)bpFITB17 bp17 bpNANAPNC 15 bp10 bp(6)bp(11)bpRF19 bp17 bp(5)bp(3)bpSTI 14 bp13 bp(7)bp(12)bpUSB 9 bp2 bp(2)bp(9)bpWFC 1 bp4 bp(11)bp(13)bpMedian(ex-FITB)14 bp6 bp(4)bp(11)bpSource:Company reports and J.P.Morgan estimates.8North A
47、merica Equity Research09 July 2019Vivek Juneja(1-212)622-Interest Bearing Deposit Costs To Rise Further Near Term,But At Slower RateWe expect banks deposit costs to rise further as banks need funding for loan growth and as customers lock in deposit rates.However,the pace of increase in deposit costs
48、 should slow as there are no more Fed rate hikes and expectations have instead shifted to Fed rate cuts,which has driven down market rates.Near term,deposit costs are likely to be hurt by continued shift from non-interest bearing deposits into interest bearing deposits.Banks have recently lowered ra
49、tes offered on CDs and other rate sensitive deposits,but marginal cost of new deposits remains above existing cost of interest bearing deposits,which averaged 95bp at our banks in 1Q19.Table 6:Interest Bearing Deposit Costs Likely to Rise Further but at Slower Pace Interest bearing deposit costQoQ C
50、hangeRate4Q181Q192Q19E3Q19E1Q19BAC 12 bp9 bp2 bp1 bp0.76%BBT 12 bp17 bp4 bp2 bp0.95%C7 bp10 bpNANA1.46%CFG12 bp17 bp5 bp1 bp1.27%FITB15 bp12 bp3 bp(1)bp1.05%JPM 11 bp8 bpNANA0.80%PNC 16 bp11 bp3 bp1 bp0.98%RF10 bp19 bp4 bp3 bp0.73%STI 10 bp9 bp3 bp1 bp0.84%USB 17 bp14 bp4 bp1 bp1.08%WFC 11 bp12 bp3