1、North America Equity Research02 July 2019U.S.Mid-and Small-Cap Banks 2Q19 Earnings PreviewReducing EPS With a NIM Storm on the Way;Rate Cut Playbook;Leveraged Loans On Our RadarU.S.Mid and Small Cap BanksSteven Alexopoulos,CFA AC(1-212)622-Bloomberg JPMA ALEXOPOULOS Alex Lau(1-212)622-Janet Lee(1-21
2、2)622-Anthony Elian,CFA(1-212)622-J.P.Morgan Securities LLCSee page 169 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
3、 could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.We turned bearish on regional banks in early October 2018 and dont see an end to thebear market for bank stocks any time soon.In fact,we look to second quart
4、er earnings as a catalyst for long-only funds to further reduce exposure to banks with,quite literally,there being nowhere to hide.Interest rates dropped like a rock through the quarter with 2Q NIMs likely to feel the squeeze of an inverted yield curve.In fact,we cant think of many prior periods whe
5、re deposit costs were rising simultaneous with earning asset yields declining.In addition to us bracing for substantial NIM pressure in 2Q,we see the forward guide for the rest of 2019 as well as 2020 to be even worse.While many banks have been in denial that the next move out of the Fed was likely
6、a cut,with July now pricing in 100%odds of a cut,managements will need to give a forward look on net interest margins assuming the forward curve and,to this end,were bracing for shock and awe.While credit quality is likely to remain healthy in the quarter,we stand behind our call that the next credi
7、t cycle could be worse than prior cycles.In fact,we see the rampant growth of covenant lite leveraged loans as having the potential to cause a minor downturn in the economy to become more pronounced as a result of these assets being held by trustees and custodians rather than banks(which are the ide
8、al party to work out problem loans given that liquidity flows into banks during downturns and out of nonbanks!).With a backdrop for banks that offers much more risk than reward,our bearish call on bank stocks remains fully intact.Rate Cut Scenario Playbook.With the 10-year yield now below the fed fu
9、nds rate,we believe the worst pressure on NIMs this cycle is now at our doorstep.In fact,with rates across the yield curve plunging while deposit costs are still marching higher,we see NIMs declining in the 20 bps range in the remainder of 2019.While pressure will be worse over the near term on liab
10、ility sensitive banks,once the Fed starts cutting rates,the more intense pressure will spread to asset sensitive banks.Leveraged Lending Being Done Outside of the Bank System Could Be a Big Problem for Banks.As central banks around the world have conducted one of the largest experiments in history v
11、ia QE,a side effect of rates being deeply negative across many developed economies has been a global search for yield,contributing directly to the rampant growth of covenant lite leveraged loans.In fact,leveragedloans are now$1.2T(vs.$1.3T of subprime securities pre-GFC),with covenant lite making up
12、 85%of leveraged loan issuance.In the next downturn,these new entrants will likely prove to be far less equipped than banks to work through problem loans.Key 2Q19 Trends:(1)We expect NIMs to contract 4 bps q/q,driven by loan yields declining 1 bp and interest bearing deposit costs rising 6 bps,(2)We
13、 project average loans(+6.6%ann.)and average deposits(+5.4%ann.)to increase at a solid pace q/q,(3)Mortgage banking likely to be stronger with total origination volumes rising 54%q/q per the MBA forecast,(4)Credit metrics likely to tick up sequentially and come off low bases,and(5)ROTEs to remain re
14、latively stable q/q at 15.8%.Sector Positioning:FRC remains in the#1 Spot,FHN moves to#2,and NYCB again our top UW.While FRC remains our top pick,we will likely see a better buying opportunity on earnings.Moving into#2 is FHN as its bond trading business should see a surge in revenue with an ideal e
15、nvironment ahead.With NYCB most directly impacted by new rent regulations,it is again our top Underweight.2North America Equity Research02 July 2019Steven Alexopoulos,CFA(1-212)622-Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateAmalga
16、mated BankAMAL US561.0917.66OWn/c18.50Dec-20n/cDec-19BankUnitedBKU US3,347.0133.76UWn/c34.00Dec-2037.00Dec-19Cadence BancorporationCADE US2,667.9520.72OWn/c22.50Dec-2024.50Dec-19Comerica IncorporatedCMA US11,347.0573.01Nn/c74.00Dec-2083.00Dec-19Cullen/Frost Bankers Inc.CFR US5,916.3793.79UWn/c90.00D
17、ec-20100.00Dec-19FB FinancialFBK US1,141.5537.00Nn/c37.50Dec-2038.00Dec-19First HawaiianFHB US3,474.7825.72Nn/c26.50Dec-2028.00Dec-19First Horizon NationalFHN US4,698.8814.90OWn/c16.50Dec-2017.00Dec-19First RepublicFRC US16,558.5298.92OWn/c112.00Dec-20118.00Dec-19Great Western Bancorp,Inc.GWB US2,03
18、4.4135.73Nn/c35.00Dec-20n/cDec-19Huntington BancsharesHBAN US14,461.8013.82Nn/c14.00Dec-20n/cDec-19KeyCorpKEY US18,075.2417.84Nn/c17.50Dec-20n/cDec-19M&T BankMTB US23,338.97170.81Nn/c174.00Dec-20173.00Dec-19Metropolitan Bank Holding Corp.MCB US368.2044.44OWn/c46.00Dec-20n/cDec-19New York Community B
19、ankNYCB US4,723.7610.11UWn/c9.50Dec-2011.50Dec-19Peoples United FinancialPBCT US6,263.7916.83Nn/c17.00Dec-2017.50Dec-19Signature BankSBNY US6,812.11123.24OWn/c132.00Dec-20147.00Dec-19SVB Financial GroupSIVB US11,686.67223.36OWn/c250.00Dec-20285.00Dec-19Synovus Financial Corp.SNV US5,521.9135.07Nn/c3
20、5.00Dec-2039.00Dec-19Texas Capital Bancshares,Inc.TCBI US3,076.1361.20Nn/c65.00Dec-2061.00Dec-19Umpqua Holdings CorporationUMPQ US3,710.2916.83Nn/c17.00Dec-2017.50Dec-19Webster Financial CorporationWBS US4,371.8747.54OWn/c51.00Dec-2058.00Dec-19Zions Bancorp NAZION US8,455.8346.33Nn/c47.00Dec-2050.00
21、Dec-19Source:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 01 Jul 19.3North America Equity Research02 July 2019Steven Alexopoulos,CFA(1-212)622-Table of Contents2Q19 Sector Outlook.5Key Valuation Metrics.16Deep Dive:Rate Cut Scenario Playbook.17The Road Ahead.35Summary o
22、f Revisions to EPS Estimates.38Portfolio Manager 2Q19 Macro Summary.39Mid-and Small-Cap Bank Trends at a Glance.40JPM vs.Consensus EPS Estimates.49Amalgamated Bank 2Q19 Preview(AMAL,OW).50BankUnited 2Q19 Preview(BKU,UW).54Cadence 2Q19 Preview(CADE,OW).58Comerica 2Q19 Preview(CMA,N).63Cullen/Frost 2Q
23、19 Preview(CFR,UW).67FB Financial 2Q19 Preview(FBK,N).70First Hawaiian 2Q19 Preview(FHB,N).74First Horizon 2Q19 Preview(FHN,OW).78First Republic 2Q19 Preview(FRC,OW).83Great Western CY2Q Preview(GWB,N).89Huntington 2Q19 Preview(HBAN,N).93KeyCorp 2Q19 Preview(KEY,N).97M&T Bank Corporation 2Q19 Previe
24、w(MTB,N).102Metropolitan Commercial Bank 2Q Preview(MCB,OW).106New York Community Bank 2Q19 Preview(NYCB,UW).111Peoples United 2Q19 Preview(PBCT,N).116Signature Bank 2Q19 Preview(SBNY,OW).119SVB Financial 2Q19 Preview(SIVB,OW).123Synovus 2Q19 Preview(SNV,N).127Texas Capital 2Q19 Preview(TCBI,N).131U
25、mpqua 2Q19 Preview(UMPQ,N).135Webster 2Q19 Preview(WBS,OW).139Zions 2Q19 Preview(ZION,N).1434North America Equity Research02 July 2019Steven Alexopoulos,CFA(1-212)622-Table 1:US Mid-and Small-Cap Banks Valuation SummarySource:Company reports and J.P.Morgan estimates.Priced as of 6/28/19.Price/Price/
26、Price/Price/2018APrice/DollarMRQCurrentDec 20TotalMarket2018A2019E2020E2021ECoreCoreCoreCoreTBVTangibleVolume TBVDividendShort JPMSeniorLast PriceAssetsCapEPSEPSEPSEPSEPSEPSEPSEPSPer Book30 Day MAPer YieldInterestTickerCompanyRatingAnalystPriceTarget($Bil.)($Bil.)(x)(x)(x)(x)2018A2019E2020E2021EShar
27、e(%)($MM)Share(%)(%of o/s)AMALAmalgamated BankOverweightAlexopoulos$17.45$18.50$4.9$0.612.612.510.79.1$1.38$1.40$1.63$1.91$13.17133%$0.9$13.690.0%0.6%BKUBankUnitedUnderweightAlexopoulos$33.74$34.00$32.7$3.310.712.311.010.1$3.16$2.75$3.07$3.34$26.64127%$22.7$28.702.5%3.0%CADECadence BancorporationOve
28、rweightAlexopoulos$20.80$22.50$17.5$2.710.18.98.68.1$2.06$2.33$2.41$2.56$13.62153%$22.8$13.233.4%2.8%CMAComericaNeutralAlexopoulos$72.64$74.00$70.7$11.210.09.08.88.3$7.25$8.07$8.25$8.75$42.89169%$122.0$43.553.7%3.6%CFRCullen/FrostUnderweightAlexopoulos$93.66$90.00$31.7$5.913.713.713.613.0$6.86$6.85$
29、6.86$7.21$40.75230%$23.7$44.253.0%3.6%FBKFB FinancialNeutralLau$36.60$37.50$5.3$1.114.012.912.111.0$2.62$2.83$3.02$3.33$17.02215%$2.9$17.730.9%1.3%FHBFirst HawaiianNeutralAlexopoulos$25.87$26.50$20.4$3.512.611.911.811.3$2.05$2.17$2.19$2.29$11.22231%$18.2$11.874.0%1.1%FHNFirst Horizon NationalOverwei
30、ghtAlexopoulos$14.93$16.50$41.1$4.710.610.29.18.4$1.40$1.47$1.63$1.78$8.81169%$45.0$9.113.8%5.0%FRCFirst Republic BankOverweightAlexopoulos$97.65$112.00$101.8$16.320.519.017.315.2$4.75$5.14$5.63$6.41$45.22216%$93.5$46.810.8%5.7%GWBGreat Western BancorpNeutralLee$35.72$35.00$12.8$2.012.111.511.210.6$
31、2.95$3.11$3.20$3.38$18.72191%$10.1$19.253.4%2.8%HBANHuntington BancsharesNeutralAlexopoulos$13.82$14.00$108.2$14.511.210.710.510.0$1.23$1.29$1.32$1.39$7.29190%$137.1$7.624.3%2.3%KEYKeyCorpNeutralAlexopoulos$17.75$17.50$141.5$17.910.210.09.89.2$1.74$1.77$1.82$1.92$11.10160%$156.7$11.513.8%1.5%MCBMetr
32、opolitan Bank HoldingOverweightLau$44.00$46.00$1.7$0.414.411.710.99.4$3.06$3.75$4.05$4.68$30.34145%$1.0$31.070.0%0.4%MTBM&T BankNeutralAlexopoulos$170.07$174.00$120.0$23.212.811.711.010.0$13.33$14.54$15.51$17.04$69.21246%$112.0$71.132.4%1.0%NYCBNY Community BancorpUnderweightAlexopoulos$9.98$9.50$52
33、.1$4.712.413.412.411.4$0.80$0.75$0.80$0.88$7.85127%$56.6$7.926.8%10.4%PBCTPeoples UnitedNeutralAlexopoulos$16.78$17.00$48.1$6.712.812.812.011.4$1.31$1.32$1.39$1.47$9.23182%$46.6$9.354.2%5.5%SBNYSignatureOverweightAlexopoulos$120.84$132.00$48.5$6.713.111.110.39.3$9.25$10.86$11.78$12.97$79.16153%$52.0
34、$81.511.9%1.7%SIVBSVB FinancialOverweightAlexopoulos$224.59$250.00$60.2$11.712.311.410.99.4$18.22$19.73$20.57$23.85$97.29231%$113.3$98.420.0%2.3%SNVSynovusNeutralAlexopoulos$35.00$35.00$46.6$5.59.68.58.27.6$3.64$4.11$4.26$4.62$24.78141%$49.5$24.273.4%3.2%TCBITexas Capital BancsharesNeutralAlexopoulo
35、s$61.37$65.00$28.4$3.110.79.89.49.0$5.73$6.24$6.52$6.85$49.44124%$32.7$51.000.0%4.1%UMPQ Umpqua HoldingsNeutralAlexopoulos$16.59$17.00$27.4$3.710.710.49.99.3$1.55$1.59$1.68$1.78$10.19163%$21.6$10.445.1%1.7%WBSWebster HoldingOverweightAlexopoulos$47.77$51.00$28.2$4.412.711.711.410.7$3.76$4.07$4.20$4.
36、48$23.67202%$29.8$24.553.4%3.4%ZIONZions BancorporationNeutralAlexopoulos$45.98$47.00$69.2$8.411.210.610.19.6$4.12$4.33$4.56$4.80$31.97144%$93.8$32.922.6%13.5%Mid-and Small-Cap Bank Average12.311.510.99.6169%3.4%2.8%5North America Equity Research02 July 2019Steven Alexopoulos,CFA(1-212)622-2Q19 Sect
37、or OutlookBear Market for Bank Stocks Unlikely to End Anytime Soon;We Look at the Underappreciated Risk with LeveragedLendingSince we turned bearish on regional bank stocks in early October 2018,over the past several months investors have commented to us that they were surprised by just how bearish
38、we had become on regional bank equities.In fact,it surprised many investors when we indicated that the last time we were this bearish on regional bank stocks was during the Great Financial Crisis of 2008/2009.With that said,however,postannouncement of a threat of US tariffs on Mexico(on May 30,2019)
39、,this seemed to be an inflection point for bond as well as stock markets,with many more investors in the aftermath migrating over to our bear camp on regional banks.With that said,however,on an overall basis we still see investors as having too much exposure to regional banks.As we met with investor
40、s through the quarter,we continued to hear from many that bank stocks were still attractive with factors such as(1)cheap valuations,(2)strong credit quality,and(3)the potential for M&A as reasons for maintaining sector exposure.In our view,however,we see far too much risk in the regional bank sector
41、 and without the commensurate reward potential.As a result,our bearish call on regional banks remains fully intact.With the two main pressure points on bank stocks being net interest margins and credit quality,we see pressure ramping sharply on bank NIMs over the near term while credit risk is likel
42、y to rise even further over the intermediate term.We would also remind investors that we see a near term storm ahead in terms of credit risk,with the outcome of the next cycle likely to be worse than prior cycles.In terms of the potential pressure on bank net interest margins,banks are now at an unu
43、sual juncture in that,at least over the very near term,deposit costs are likely to continue resetting higher,but in the backdrop of earning asset yields seeing downward pressure.Conceptually speaking,this is being driven by the further inversion of the yield curve during the quarter(as measured from
44、 the fed funds rate to the 10-year portion of the curve).In terms of the potential for higher deposit rates,while the direction of deposit costs is still likely higher,today we find ourselves in largely unchartered waters.In fact,while our models that forecast deposit rates continue to suggest that
45、deposit costs still need to reset around 75-80 bps above levels reported in 1Q19(in the 1.0%range),with the forward curve now implying over four cuts in the funds rate through YE20,a shift in deposit behavior from the banks is likely to throw a monkey wrench in ourforecast.Case in point,during the q
46、uarter we hosted meetings with several bank management teams and while the messaging around deposits was very diverse,with some banks still increasing well below market rates on money market deposits for example,other banks indicated that in response to the forward curve now showing rate cuts that t
47、hey were not only slowing the pace of deposit promotions,but for the promotions still in the market,duration was being cut down dramatically(for example,a prior 24-month CD promotion was being replaced with a 9-month promotion and at a lower rate).As a result of this shift in deposit behavior now ta
48、king place,while we continue to see upward pressure on deposit rates we now see deposit betas trailing off materiallyand potentially sooner than later.Even with 6North America Equity Research02 July 2019Steven Alexopoulos,CFA(1-212)622-deposit pressure likely abating over the next few quarters,howev
49、er,given the inverted yield curve,downward pressure on NIMs is likely to persist.During the second quarter,the 5-year Treasury yield declined 47 bps(q/q)while the10-year Treasury yield declined 40 bps(q/q).On a year-over-year basis,the 10-year Treasury yield has declined by 83 bps.With longer-term i
50、nterest rates falling precipitously over the past year,or the past quarter for that matter,this will place downward pressure on the yields of mortgage related assets(such as resi mortgage and commercial real estate)as well as securities portfolios.While the potential for deposit cost pricing pressur