1、Equity Research 15 March 2019 CORE Barclays Capital Inc.and/or one of its affiliates 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.Inves
2、tors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 65.Restricted-Internal U.S.Large-Cap Banks 2018 10-K Review&Current Events EPS outlook:Expectations for 2019 include modest loan
3、 growth(though broad-based),stable-to-modestly higher net interest margins(even without any Fed hikes),higher fee income(though near-term pressures),positive operating leverage(aided by lack of DIF surcharge),higher loan loss provision from historically low levels(though only a modest increase in ne
4、t charge-offs),higher tax rates(though below prior expectations),active share repurchase,and reduced capital ratios.Still,results in 1Q19 face some headwinds.They will be adversely impacted by two fewer days weighing on net interest income(but the full impact of the mid-December Fed hike should help
5、 to offset);reduced mortgage originations;the spillover effect of 4Q18s equity market sell-off,particularly for those businesses that price on a lagged basis;lower y-o-y trading revenues(but sharp linked quarter increase);and seasonally elevated expenses.In 1Q19,WFC is expected to book a gain on the
6、 sale of the$2.4bn Pick-a-Pay loans($0.16,we estimate),while BK is expected to take$0.02 charge tied to PG&E.Lease accounting:Starting in 1Q19,ASU 2016-02 requires lessees to recognize lease contracts on the balance sheet.We expect the increase in assets to results in a 6bp decline in the CET1 ratio
7、 at the median bank,led by MS,BK,STT,NTRS,BAC,and WFC.Asset quality:BK said NPAs and its loan loss provision will increase in 1Q19 as a result of PG&Es bankruptcy.We believe BAC,WFC,C and USB,among others,also have exposure.Relative to 3Q18,criticized loans increased at MS(+21%),MTB(+18%),STT(+12%),
8、BBT(+11%),ALLY(+9%),JPM(+6%),and NTRS(+4%).RPL:WFC(+$500mn),COF(+$350mn),STT(+$255mn),and GS(+$100mn)saw their reasonably possible losses in excess of existing legal reserves increase in 4Q18.Rates:BAC,CFG,RF,HBAN and CMA appear to be the biggest beneficiaries of a 100bp parallel increase in U.S.int
9、erest rates at 4Q18.COF,FITB,USB,and MTB stand out at the other end.Assuming a 100bp parallel decrease,ALLY,STT,CFG,WFC and STI would hold up best,while CMA,BAC,RF,BBT and HBAN would be the most adversely impacted.MS,CMA,BAC,COF and KEY saw the largest reductions in asset sensitivity from 3Q18 to 4Q
10、18,while NTRS,ALLY,BK,RF and STI experienced increases.Beta:For 4Q18,the deposit beta was 41-42%for the 3rd straight quarter,bringing the cumulative beta to 28%.In the 2004-06 cycle,post the first 200bps of rate hikes,the cumulative beta was 45%.So far this cycle,ALLY,BK,COF,CFG,USB,and C have poste
11、d the highest deposit betas,while STT,RF,MTB,CMA,BAC,and STI stand out on the other end.In the 2004-06 cycle,CMA,STT,NTRS,STI,and FITB had relatively higher betas,while BAC,KEY,MTB,USB,and CFG were below peers.Shares:Looking at the share counts on the 10-K covers,relative to 4Q18 period-end,shows BK
12、,GS,WFC,ALLY,C,and BAC with the largest reductions(2%+).COF finished its CCAR 2018 buyback allocation in 4Q18,while HBAN,CFG and KEY were more than two-thirds complete.BAC and PNC,post recent resubmissions,have the most to go.INDUSTRY UPDATE U.S.Large-Cap Banks POSITIVE Unchanged U.S.Large-Cap Banks
13、 Jason M.Goldberg,CFA+1 212 526 8580 BCI,US Inna Blyakher+1 212 526 3904 BCI,US Matthew Kesselhaut+1 212 526 0181 BCI,US Eugene Koysman+1 212 526 0971 Eugene.K BCI,US Brian Morton,CFA+1 212 526 2163 BCI,US Barclays|U.S.Large-Cap Banks 15 March 2019 2 CONTENTS Outlook.3 EPS Outlook.3 Gains&Charges.3
14、Mergers,Acquisitions&Divestitures.3 Profitability Targets.5 Current Events.6 Interest Rates.6 Deposit Beta.7 Current Expected Credit Loss(CECL)Model.10 Leasing Accounting Change.11 PG&E Exposure.12 Foreign Exposure.13 Brexit.13 Other Foreign Exposures.13 Legal.18 Interest Rate Sensitivity.19 Balance
15、 Sheet.23 Loans.23 Securities Portfolio.25 Deposits.27 Net Interest Margin.28 Asset Quality.31 Criticized Loans.31 Level 3 Assets.32 Capital.33 Share Repurchase.35 Auditors.37 Business Mix.37 Company Summaries.48 Barclays|U.S.Large-Cap Banks 15 March 2019 3 Outlook EPS Outlook Generally speaking,the
16、 2018 10-Ks reiterated the earnings guidance provided on this past quarters EPS conference calls(see Figure 81 through Figure 83).For 2019,most banks guided to:modest loan growth(though broad-based),stable-to-modestly higher net interest margins(even without any Fed hikes),higher fee income,positive
17、 operating leverage(aided by lack of DIF surcharge),higher loan loss provision from historically low levels with only a modest increase in net charge-offs(also from historically low levels),higher tax rates(though below prior expectations),active share repurchase,and reduced capital ratios.Still,we
18、caution results in 1Q19 face several headwinds.They will be adversely impacted by two fewer days weighing on net interest income(though the full impact of the mid-December Fed hike should help to offset);reduced mortgage originations;the spillover effect of 4Q18s equity market sell-off particularly
19、for those businesses that price on a lagged basis;lower y-o-y trading revenues(but sharp linked quarter increase);and seasonally elevated expenses associated with the timing of compensation awards and payroll taxes.Gains&Charges BK:BK has unsecured funded exposure of$160mn to a California utility co
20、mpany that filed for bankruptcy in 1Q19.As of February 27,BK expects this exposure to decrease by$60mn as a result of current sales.Its NPAs are expected to increase in 1Q19 as a result.Based on current conditions,BK expects to record an additional loan loss provision relating to this exposure of$20
21、-$30mn($0.02)in 1Q19.STT:As STT integrates CRD into its business,it expects to incur$200mn,including the$31mn in 2018,of acquisition costs,including merger and integration costs,through 2021.WFC:It expects to close on the sale of the$2.4bn Pick-a-Pay PCI loan portfolio in 1Q19.We estimate a gain in
22、the$0.9bn area($0.16).Mergers,Acquisitions&Divestitures BBT/STI:On February 7,BBT announced a merger with STI.SunTrust Bank will merge with and into Branch Bank,with Branch Bank as the surviving entity.Shareholders of STI will receive 1.295 shares of BBT common stock for each share of STI common sto
23、ck.The merger is expected to close late in the 3Q19 or 4Q19.Both companies are similarly sized with BBT at$226bn(#11 in the U.S.)in assets and STI(#12)at$216bn,resulting in a pro forma company at$441bn,creating the 6th largest bank in the U.S.(ex.GS and MS)and the number 3 player in the attractive S
24、outheast/Mid-Atlantic market,behind BAC and WFC.The combined company will operate under a new name(to be determined)and brand,while the board of directors and executive management team will be evenly split.CFG:On January 3,CFG closed on its purchase of Clarfeld Financial Advisors,a wealth management
25、 firm and multi-family office headquartered in Tarrytown,NY.As of 3Q18,Clarfeld held$6.6bn of assets under management and$900mn of assets under administration.On March 1,it closed on its purchase of Bowstring Advisors(formerly CHILDS Advisory Partners),an Atlanta-based M&A advisory firm.The purchase
26、 more than doubles CFGs M&A advisory business including the healthcare,technology and business services sectors.COF:On July 26,COF announced that it entered into a new,long-term credit card program agreement with Walmart(WMT).Under the terms of the agreement,it will become the Barclays|U.S.Large-Cap
27、 Banks 15 March 2019 4 exclusive issuer of WMTs co-brand and private label credit card program in the U.S.On January 22,COF announced that it entered into a definitive agreement to acquire the existing portfolio of WMTs co-brand and private label credit card receivables.At closing,COF expects the po
28、rtfolio will consist of$9bn of receivables.COF expects to launch the new issuance program and close on the acquired portfolio late in 3Q19 or 4Q19.FITB:In May,FITB announced an agreement to acquire MB Financial(MBFI),a Chicago-based middle-market commercial bank for$4.7bn(20%of its market cap).MBFI
29、shareholders will receive$54.20 of total consideration,consisting of 1.45 shares of FITB(90%)and$5.54 in cash(10%).MBFI has$20bn in assets and increases FITBs footings by 14%to$162bn pro forma.MBFI had 86 branches(predominantly located in Cook and DuPage counties)and 120 ATMs.This acquisition is exp
30、ected to close on March 22.GS:Late last year,GS acquired Aptitude Investment Management,a fund-of-hedge funds manager on the West Coast,which has offices in Seattle and Vancouver,oversaw$3.5bn in discretionary assets across separately managed accounts and commingled vehicles.In early November,it ann
31、ounced the acquisition of Rocaton Investment Advisors,expanding its retirement and advisory platform.Rocaton has$600bn in assets under advisement(GSAM has$1.5trn in assets under supervision)and offers advisory and discretionary investment services to institutional clients including retirement plans,
32、healthcare and insurance companies,endowments,foundations and financial intermediaries.This transaction is expected to close in 1H19.HBAN:During 4Q18,HBAN announced the sale of its WI branch banking operations.The transaction is expected to close in June.At announcement,ASB expected to acquire$850mn
33、 in deposits(granular branch deposits with less than a 1%costs of funds),$134mn in loans(consumer,small business,and commercial),and 32 branches,for a net premium of$34mn,representing 4%of the deposits(majority of owned facilities).HBAN expects an immaterial after-tax gain.KEY:In Jan 2019,KEY announ
34、ced the acquisition of Laurel Roads digital lending business.Through the acquisition,KEY expects to enhance its digital capabilities and to leverage it to attract and serve professional millennial clients.The acquisition is expected to close in mid-2019,and added$20mn in revenues and$50mn in expense
35、s to 2019s results.MS:On Feb 11,MS announced the purchase of Solium Capital(TSX:SUM),a global provider of software-as-a-service(SaaS)for equity administration,financial reporting and compliance for$0.9bn.The transaction is expected to have a minimal impact on the MSs earnings and capital ratios.MS d
36、oes not anticipate any adjustments to the share repurchases in 1Q19 or 2Q19.The transaction is expected to close in 2Q19.MTB:On January 31,MTB purchased residential MSRs with outstanding loan balances of$13.3bn for$146mn.MSR transfer is expected to occur in 2Q19.At 4Q18 its residential real estate l
37、oans serviced for others totaled$79.1bn.NTRS:In November,NTRS completed its acquisition of BEx LLC,a provider of foreign exchange software solutions,for$37.6mn,inclusive of cash consideration of$31.2mn paid in 4Q18.The related purchase accounting is expected to be completed in 1Q19.Barclays|U.S.Larg
38、e-Cap Banks 15 March 2019 5 Profitability Targets Several have recently updated their profitability targets,including RF guiding to an 18-20%ROTCE and sub-55%efficiency ratio and FITB lowering its CET1 target from 9.0-9.5%to simply 9.0%.In addition,BBT/STI put out 2021 profitability expectations.FIG
39、URE 1 Profitability Targets Source:Barclays Research and Company reports Time FrameROEROTCEROAEfficiencyNCO RatioCET1 RatioALLY201912-13%+46.6-47.6%9.0%BACLong-term12%1.00%60%10.0-10.5%BBTLong-term12-15%19-22%1.40-1.70%0.40-0.60%9.50-9.75%BBT/STI202122%51.0%9.75-10.0%BKLong-termCLong-term16%Low 50%1
40、1.5%CFGMedium-term14-16%54%10.0%CMAMedium-term13-15%1.10-1.30%55%9.5-10%COF11.0%FITB202018%+1.55-1.65%53.0%9.0%GSHBANLong-term17%-20%53%-56%0.35-0.55%9-10%JPMMedium-term17%55%11-12%KEYLong-term16-19%54-56%0.40-0.60%9-9.5%MS2018-201910-13%11.5-14.5%73%MTBLong-term55%NTRSLong-term10-15%PNCRF202118-20%
41、55%0.40-0.65%9.5%STILong-term14-16%56-58%8-9%STTLong-term12-15%USBLong-term14.5-17.5%Low 50%0.95%8.5%WFCThru 201912-15%14-17%55-59%0.60-0.70%10.25-10.5%13.5%15.8%1.38%54.0%0.51%9.7%MedianBarclays|U.S.Large-Cap Banks 15 March 2019 6 Current Events Interest Rates As detailed beginning on page 19,based
42、 on their disclosed interest rate sensitivity simulations with some adjustments for methodology differences,BAC,CFG,RF,HBAN and CMA would be the biggest beneficiaries of a 100bp parallel increase in U.S.interest rates at 4Q18.COF,FITB,USB,and MTB stand out at the other end.Assuming a 100bp parallel
43、decrease in interest rates at 4Q18,ALLY,STT,CFG,WFC and STI would hold up best,while CMA,BAC,RF,BBT and HBAN would be the most adversely impacted.Still,it is important to note,these ranking are heavily influenced by company assumptions.The following charts from Figure 2 through Figure 5 are based on
44、 each banks 2018 10-K disclosure of interest rate sensitivity.FIGURE 2 EPS Benefit from 100bps Parallel Increase in Rates-1%0%1%2%3%4%5%6%BACCFGRFHBANCCMASTTNTRSBKPNCALLY WFCBBTKEYSTIJPMMTBUSBFITBCOF Source:Barclays Research and Company reports FIGURE 3 Impact to Net Interest Margin from 100bps Para
45、llel Increase in Rates -0.02%0.00%0.02%0.04%0.06%0.08%0.10%0.12%CMABACRFHBAN STTCFGBKNTRSCPNCBBTKEYMTBWFCSTIJPMALLYUSBFITBCOF Source:Barclays Research and Company reports Barclays|U.S.Large-Cap Banks 15 March 2019 7 FIGURE 4 EPS Benefit from 100bps Parallel Decrease in Rates -10%-9%-8%-7%-6%-5%-4%-3
46、%-2%-1%0%ALLYSTTCFGWFCSTICOFUSBBKCPNCJPMKEYMTB NTRS FITB HBAN BBTRFBACCMA Source:Barclays Research and Company reports FIGURE 5 Impact to Net Interest Margin from 100bps Parallel Decrease in Rates -0.25%-0.20%-0.15%-0.10%-0.05%0.00%ALLYCFGWFCSTTCSTICOFBKUSBPNCJPMNTRSKEYFITB HBAN MTBRFBBTBACCMA Sourc
47、e:Barclays Research and Company reports Deposit Beta For 4Q18,the deposit beta was 41-42%for the 3rd straight quarter,bringing the cumulative beta cycle-to-date to 28%,up from 26%.Cycle-to-date through 4Q18,the rate paid on interest-bearing deposits for the median bank increased 57bps,compared to a
48、205bp increase in the Fed Funds rate(using 4Q18s average rate).Looking at the 2004 cycle,post the first 200bps of rate increases,the cumulative beta was over 45%.Deposit betas generally remained higher for commercial,wealth management and online deposits than for retail deposits,which have still sho
49、wn relatively little movement to date.In 4Q18,BK(+23bps),NTRS(+18bps),USB(+17bps),PNC(+16bps),KEY(+15bps),and FITB(+15bps)saw the largest increases in their cost of interest-bearing deposits,while STI(+10bps),RF(+10bps),WFC(+11bps),JPM(+11bps),HBAN(+11bps),and CMA(+11bps)stood out on the other end.A
50、t 4Q18,ALLY,COF,C,CFG,FITB,and USB had the highest interest-bearing deposit costs,while STT,RF,MTB,CMA,and BAC were the lowest.So far this cycle,ALLY,BK,COF,CFG,USB,and C have posted the highest deposit betas(40-48%),while STT,RF,MTB,CMA,BAC,and STI stand out on the other end with 31%and lower.In Ba