1、North America Equity Research09 April 2019Large Cap Banks 1Q Preview1Q:Weak Mkts,Including Lag Effects,C&I Loans Better Than Feared,NIM Down;Priced In?Banks 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 pa
2、ge 36 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 cons
3、ider this report as only a single factor in making their investment decision.We expect 1Q earnings to be soft,marked by weak markets-related revenues,shift in interest rate environment,and seasonal decline in some fee income areas.We expect a modest decline in net interest margins(NIM)but decent loa
4、n growth,benefiting from strong 4Q growth.Key concern is whether banks are seeing any signs of weakness in their customers even though credit quality currently looks strong.Capital markets activity,notably equity issuance has picked up since late March,and M&A activity also increased in March.Conver
5、sely,in a shift,institutional leveraged loan growth slowed in March.Bank stocks lagged post Feds shift in stance on interest rates,have been choppy recently,and are still attractively valued.We believe expectations for a weak 1Q are priced in.Relatively,leading into 1Q,we like Citi and Regions Citi
6、should be less impacted by a flatter yield curve(vs peers),and Regions has better qoq comps given a messy 4Q.However,Bank of America will likely be impacted by both lower rates and lagged 4Q markets-related impact on fees.And US Bancorp will likely be hurt by seasonal weakness in fees and increased
7、pricing pressure in payments business,exacerbated by timing issues in 1Q.We are trimming estimates mainly to reflect weak markets-related revenues plus some impact from lower interest rates and a flatter curve.Medium term,challenge for bank stocks is lack of catalysts with no more rate hikes,flatter
8、 yield curve,and moderate loan growth.Period end C&I loan growth on qoq basis likely better than feared given extremely strong 4Q,based on Fed H8 data.PE C&I loan growth is generally seasonally weaker in 1Q.This continued in 1Q19,but qoq growth remained similar to 1Q18 growth despite strong boost in
9、 4Q from weak capital markets and concerns that some would be refinanced in the markets as those recovered.Average loan growth in 1Q looks better due to growth from 4Q.We expect NIM to be down 1bp qoq on average due to hit from higher MBS premium amortization and continued increase in deposit costs,
10、coupled with no increase in 1 month Libor in 1Q,which drives commercial loan yields.We expect NIM to decline a little further in 2019 if interest rates stay at current levels.Credit quality remains fine.Large banks have reduced subprime consumer loans post crisis,and holdings of leveraged loans.They
11、 have returned a lot of capital partly due to slow loan growth.We expect some modest seasoning to drive increase in credit losses near term,partly because net recoveries cannot continue indefinitely.Weak investment banking volumes in 1Q in most categories,notably equity issuance this was partly due
12、to govt.shutdown.Equity issuance picked up strongly in late March and has continued into April.M&A volumes also rose sharply in March for the best month since April 2018.Trading revenues are likely to be down yoy,partly due to tough comps,especially in equities.Mortgage origination revenues should r
13、ise,led by higher refis and gain on sale margins.However,this will likely be offset at some banks by net MSR hedge losses with impairments from the sharp drop in rates.Per MBA,applications rose 17%qoq.Banks are attractively valued despite recent recovery.Money Centers are trading at 9.2x 2020 EPS on
14、 average,below 10.0 x long term average(ex.08-11)and Regionals at 9.6x 2020 EPS,also below 11.4x average.On relative P/E basis,Regionals are modestly below long term average,and Money Centers are in-line.2North America Equity Research09 April 2019Vivek Juneja(1-212)622-Equity Ratings and Price Targe
15、tsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateBank of AmericaBAC US282,053.1029.17OWn/c30.50Dec-1931.00n/cBB&T CorporationBBT US37,051.8448.54Nn/c51.50Dec-1950.50n/cCitigroup Inc.C US156,486.8066.07OWn/c72.50Dec-19n/cn/cCitizens Financial GroupCFG US16,156.5034.6
16、7OWn/c41.50Dec-1942.50n/cFifth Third BancorpFITB US17,374.9726.87Nn/c30.50Dec-19n/cn/cPNC FinancialPNC US59,375.12128.24OWn/c133.50Dec-19134.00n/cRegions FinancialRF US15,621.0015.24OWn/c17.50Dec-19n/cn/cSunTrust Banks,Inc.STI US27,666.8461.91OWn/c67.00Dec-1966.50n/cU.S.BancorpUSB US80,207.0449.88UW
17、n/c51.00Dec-1951.50n/cWells FargoWFC US223,933.9048.88UWn/c52.00Dec-1954.50n/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 08 Apr 19.3North America Equity Research09 April 2019Vivek Juneja(1-212)622-1Q EPS To Be Led By Weak Non-Interest Income,Modestly Lower Net
18、Interest IncomeWe expect 1Q earnings to be marked by:1)seasonal slowdown in period end loan growth,but average loan growth to hold up due to strong growth at end of 4Q;2)modest decline in net interest income and net interest margins(NIM)from day count,lower long term rates,and flat 1 month Libor rat
19、es;3)weak non-interest income,primarily from weakness in markets-related areas including investment banking,trading,retail brokerage,and asset management,mixed trends in mortgage banking,and seasonal weakness in payments-related fee income and deposit service charges;4)seasonally higher expenses;5)c
20、ontinued good credit quality,but increase in provisions from lower reserve releases and some reserve builds;and 6)continued capital return.Adjusting estimates to reflect:1)further decline in interest rates;2)rebound in market valuations from December lows;and 3)company news and guidance.oWells Fargo
21、s reported EPS is up due to a gain on sale of pick-a-pay loans,partly offset by some additional reserves for litigation.Table 1:EPS Estimate Changes$per shareSource:J.P.Morgan estimates.4North America Equity Research09 April 2019Vivek Juneja(1-212)622-Loan Growth Soft In 1Q From Seasonality Plus Wea
22、k Other Loans,But C&I Better Than FearedPer Fed data,total loans at large banks were down 1.1%qoq(+3.0%yoy)on period end basis through March 27th.QoQ trends led by a very sharp drop in other loans,seasonal slowdown in C&I loan growth,and seasonal decline in credit cards.C&I loans rose 0.7%qoq and 8.
23、7%yoy,a little below 9.0%yoy growth in 4Q.Despite extraordinarily high growth in 4Q,C&I loans have held up in 1Q,with modest qoq growth,similar to year ago in 1Q18 this is better than feared as C&I loans may have fallen in 1Q if part of the growth in 4Q was due to challenging conditions in the capit
24、al markets.Large part of the rest of the strong growth in 4Q was from financing of very high volume of M&A closings.However,C&I plus other loans fell 0.8%qoq(+7.3%yoy)due to very sharp 5.3%qoq drop in all other loans.Credit card loan growth remains slow up 2.4%yoy in 1Q,close to 1.9%-2.2%yoy growth
25、in 2H18 and far below 4.4%-5.0%yoy growth in 1H18.Credit card loans were down 5.5%qoq seasonally(vs 5.9%qoq drop in 1Q18).Table 2:Total Loans Down 1.1%QoQ,Led by Weakness in Other Loans,Seasonal Decline in Cards,and Seasonally Slower C&I GrowthLarge Banks period end growth,adjusted for M&A,as of Mar
26、ch 27,2019Source:Federal Reserve and J.P.Morgan calculations.(1)1Q19 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:Average Loan Growth in 1Q to Benefit from Strong Growth Seen at End of 4QAver
27、age total loan growthQoQ ChgYoY Chg3Q184Q181Q19E2019EBAC-0.4%0.4%1.1%2.3%BBT1.5%0.9%0.8%4.1%C0.1%0.8%1.2%3.1%CFG1.0%1.7%1.3%5.5%FITB(ex MBFI)0.8%1.6%1.2%4.1%PNC0.3%1.2%1.0%3.6%RF1.3%1.1%1.6%4.3%STI1.3%2.5%1.9%7.0%USB0.9%0.9%0.9%3.5%WFC-0.5%0.7%0.7%1.7%Median0.9%1.0%1.2%3.8%Source:Company reports and
28、 J.P.Morgan estimates.FITB is adjusted to exclude impact from its acquisition of MBFI.5North America Equity Research09 April 2019Vivek Juneja(1-212)622-Institutional Leveraged Loan Growth Slowed Later In 1Q Reasons Not Entirely ClearInstitutional leveraged loan growth has slowed to 3.0%qoq in 1Q,a l
29、ittle lower than 3.6%qoq growth seen in 1Q18,and well below 4.3%-5.5%quarterly growth from 2Q to 4Q18.Despite the closeness in 1Q19 growth to 1Q18 growth,it is not clear that this is a seasonal slowdown as the weakness in growth came in February and March.January growth was as strong as growth seen
30、in 4Q18.The reasons for the recent slowdown in institutional leveraged loan growth are not fully clear.Part of this may reflect an increase in high yield bond originations.Mutual find outflows have been occurring since November.Figure 2:Leveraged Loan Growth Slowed a Little to 3.0%QoQ in 1QQoQ insti
31、tutional leveraged loans outstanding growthSource:S&P Global Market Intelligence(LCD).As of March 29,2019.Figure 3:As Growth Slowed in February and Slowed Further in March MoM institutional leveraged loans outstanding growthSource:S&P Global Market Intelligence(LCD).As of March 29,2019.-0.5%5.6%1.4%
32、1.8%3.6%5.5%4.3%5.3%3.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%1Q172Q173Q174Q171Q182Q183Q184Q181Q19-0.9%0.3%0.2%1.0%1.6%0.9%1.7%1.0%0.3%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%Jan 17 Feb 17 Mar 17Jan 18 Feb 18 Mar 18Jan 19 Feb 19 Mar 19Figure 1:Institutional Leveraged Loans Up 19.3%YoY to$1.18 TrilInstitutional
33、 leveraged loans outstanding,$bilSource:S&P Global Market Intelligence(LCD).$-$200$400$600$800$1,000$1,200$1,400Apr8,2019:$1.180 trilYoY Growth:19.3%6North America Equity Research09 April 2019Vivek Juneja(1-212)622-NIM Likely Down Modestly And Likely To Continue On This PathNet interest margins(NIM)
34、are likely to decline modestly by 1bp qoq on average in 1Q,partly driven by flat 1 month Libor,which drives commercial loan yields,as well as sharp drops in medium term and long term rates.These would offset benefit from day count and increase in Prime-based consumer loan yields.We expect this trend
35、 in NIM to continue in 2019,with no more Fed rate hikes and a flatter yield curve.Decline in long term rates is likely to hurt 1Q19 NIM,partly due to higher MBS premium amortization expense.We expect:1)further rise in deposit costs,albeit with slower increase than during 2018;and 2)continued mix shi
36、ft with run-off of non-interest bearing deposits,albeit at a slower rate,and growth in CDs.Table 4:We Expect NIMs Likely Down Modestly in 1Q FTE net interest marginQoQ Chg4Q18 NIM3Q184Q181Q19EBAC 4 bp7 bp(3)bp2.52%BBT 2 bp2 bp(0)bp3.49%C1 bp1 bp(1)bp2.71%CFG-3 bp(3)bp3.25%FITB(ex MBFI)2 bp6 bp(0)bp3
37、.29%PNC 3 bp(3)bp0 bp2.96%RF1 bp5 bp(0)bp3.55%STI(1)bp-(0)bp3.27%USB 2 bp-(2)bp3.15%WFC 1 bp-(4)bp2.94%Median1 bp1 bp(1)bp3.20%Source:Company reports and J.P.Morgan estimates.FITB is adjusted to exclude impact from its acquisition of MBFI.Table 5:And NIM to be Down on Average in Full Year 2019 Versu
38、s 4Q18 Run RateFTE net interest marginYoY ChgChg FY2019E vs 4Q1820172018BAC 15 bp5 bp(4)bpBBT 7 bp0 bp(2)bpC(15)bp(4)bp(4)bpCFG20 bp16 bp(4)bpFITB(ex MBFI)17 bp17 bp(2)bpPNC 15 bp10 bp(1)bpRF19 bp17 bp(4)bpSTI 14 bp13 bp(5)bpUSB 9 bp2 bp(10)bpWFC 1 bp4 bp(7)bpMedian14 bp8 bp(4)bpSource:Company repor
39、ts and J.P.Morgan estimates.FITB is adjusted to exclude impact from its acquisition of MBFI.7North America Equity Research09 April 2019Vivek Juneja(1-212)622-Yield Curve Inverted Further In 1Q,Even As Rates Declined Across The Entire CurveLong term and medium term rates fell sharply in 1Q,with 10 ye
40、ar Treasury yields down 28bp qoq to 2.41%and 2 year Treasuries down 23bp qoq to 2.26%,as the Fed turned more dovish.There will be some immediate capital benefit in 1Q for banks with more than$250 bil in assets as securities are marked to market.But this will be offset over time by higher MBS premium
41、 amortization and lower reinvestment yields on longer duration assets like residential mortgages and MBS.Libor rates were mixed,with 1 month Libor flat qoq and 3 month Libor down 21bp qoq from 2.81%at YE18.Yield curve is a headwind,with the 10 yr Treasury-3 mth Libor spread inverting further to-19bp
42、,and the 2-10 yr Treasury spread down to about 15bp.Figure 4:10 Yr Treasury Yield Down More Than 3 Month Libor YieldsSource:Bloomberg and J.P.Morgan calculations.As of March 29,2019.Figure 5:Causing Yield Curve to Invert FurtherYield spread,basis pointsSource:Bloomberg and J.P.Morgan calculations.As
43、 of March 29,2019.2.0%2.2%2.4%2.6%2.8%3.0%3.2%3.4%09/1810/1811/1812/1801/1902/1903/1910 Yr UST2 Yr UST3 Mth Libor10 Yr UST:4Q Avg:3.04%1Q Avg:2.65%1Q PE:2.41%2 Yr UST:4Q Avg:2.80%1Q Avg:2.49%1Q PE:2.26%3 Mth Libor:4Q Avg:2.63%1Q Avg:2.69%1Q PE:2.60%-30207012017022027001/1407/1402/1509/1504/1611/1606
44、/1701/1808/1803/1910 Yr UST-3 Mth Libor10 Yr-2 Yr UST10 Yr UST-3 Mth Libor:4Q Avg:41bp1Q Avg:-4bp1Q PE:-19bp10 Yr-2 Yr UST:4Q Avg:24bp1Q Avg:16bp1Q PE:15bp8North America Equity Research09 April 2019Vivek Juneja(1-212)622-Period End Deposits Down Modestly;Securities Up ModestlyDeposits declined modes
45、tly by 0.6%qoq on period end basis per Fed weekly data.This decline is likely partly seasonal and likely partly due to continued deposit outflows into higher yielding alternatives.Average deposits are up 0.5%qoq.Securities were up modestly by 0.5%qoq on period end basis and are up moderately by 1.7%
46、qoq on average basis.Average growth reflects the impact of strong growth in 4Q.Reported securities amount should benefit in 1Q from unrealized gains as a result of the decline in interest rates qoq.Figure 6:Period End Deposits Down Modestly by 0.6%QoQLarge Banks deposit QoQ growthSource:Federal Rese
47、rve,J.P.Morgan calculations.As of March 27,2019.Average is of weekly figures.1Q19 is adjusted for M&A.Figure 7:Period End Securities Up Modestly by 0.5%QoQLarge Banks securities(ex unrealized g/l)QoQ growthSource:Federal Reserve,J.P.Morgan calculations.As of March 27,2019.Average is of weekly figure
48、s.1Q19 is adjusted for M&A.0.2%0.2%0.9%1.6%0.5%0.0%-0.7%1.0%3.9%-0.6%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%1Q182Q183Q184Q181Q19AveragePeriod End-0.4%-1.2%1.5%2.0%1.7%-1.8%0.9%0.8%3.2%0.5%-2.5%-1.5%-0.5%0.5%1.5%2.5%3.5%1Q182Q183Q184Q181Q19AveragePeriod End9North America Equity Research09 April 2019Vivek
49、Juneja(1-212)622-Weak Investment Bkg,Led By Equity,Syndicated Loans,But M&A,High Yield Up Sharply QoQInvestment banking fees are likely to be down yoy in 1Q across all areas,more so in equity issuance and syndicated loans.Per Dealogic data,industry fees are down 14%yoy and down 5%qoq,and will likely
50、 end up with slightly less decline.Equity underwriting activity was hurt by the government shutdown as deals were delayed.Equity underwriting did pick up in late March,and this acceleration should continue into 2Q.Loan syndications are down sharply yoy,with a large drop in leveraged loans.Total debt