L a r g e Banks: 3Q Result s

Transcription

1 L a r g e Banks: 3Q Result s j a n n e y corporat e credit O c t o b e r 28, 2014 The more things change, the more they stay the same: Banks are adapting to the current situation, but nothing too inspiring is happening. Jody Lurie Corporate Credit Analyst jlurie@janney.com See page 7 for important information regarding certifications, our ratings system as well as other disclaimers. Large Banks: 3Q Results Page 1 The largest US banks had a solid 3Q earnings season, with 13 out of the 15 largest US banks by assets at least meeting, if not outperforming, consensus for net income. Some market and rate volatility added a nuanced difference to results. Litigation issues of the past few years seem to be less in the peripheries and more in the rear view, but other risks for the larger players such as cyber attacks, international subsidiary compliance issues, and the like stirred up headline risk of late. Loan growth persisted, and for some firms shifted to healthier levels, while deposit mixes strengthened to help nudge net interest margin upwards to prevent further decline. The recent market movements and low rates left management teams with more vague and less inspiring outlooks; some optimistic undertones stemmed from progress made over recent years. Third quarter 2014 bank announcements were in some ways a replay of the most recent quarterly results, as firms are faced with the same challenges, namely the effect of the low-rate environment on traditional banking operations. As such, preventing margin deterioration and designing ways to focus on core businesses, via asset sales and exits, stood out again this quarter. Litigation expenses were less severe for most firms than in prior quarters, but trimming provisions remained a way boost the bottom line. Additionally, headcount reduction, while notable at some shops, was not seen across the board; instead, building on higher-margin and fee-based operations helped net income grow with a potentially more sustainable strategy. Net interest margin stayed a sore point for most firms, with a few exceptions. For those companies that depend on the Capital Markets for a portion of their business, this quarter s volatility versus a year-ago s sluggishness allowed banks a good comparable. For the more regionally-based banks, loan growth improved, matched by better deposit mixes to offset some of the growth in lower yielding assets. Still, while commercial & industrial and commercial real estate loans expanded, commercial and residential mortgage growth was still missing from the equation. Although still near historical lows, net charge-offs bumped up modestly for some banks, but nonperforming loans held steady or edged further downward this quarter. As a consequence of share buyback and dividend programs in place, some firms recorded reduced capital ratios, but still well above Basel III requirements; by and large, 3Q capital ratios had improved with more regulatory clarity. Looking at percentages of actual net income vs. consensus estimates, notable winners included: Goldman Sachs (42%) YoY comparisons were strong, despite mixed QoQ results; Morgan Stanley (21%) A much weaker 3Q13 set the backdrop for a good comparable; JPMorgan (16%) Lack of large legal bills supported solid QoQ and YoY growth; Bank of America (14%) Despite the settlement with the DoJ, the bottom line outperformed; and State Street (12%) Revenue growth outpacing expenses made for a better bottom line. Only two banks* fell short of consensus estimates: Fifth Third (-7%) Softer results stemmed from lower noninterest income and one-time items; and BB&T (-1%) The slight miss on the bottom line came from further interest margin decline. All other banks greater than $100B in assets** either beat or met net income estimates. Source: Janney FISR; Company Reports; *Wells Fargo, US Bancorp, and Capital One technically missed Street earnings estimates, but the difference is likely not meaningful; **We excluded Northern Trust (A2/A+/ from this report, as total assets reached above the $100B threshold in 4Q 2013, but has been below the mark historically.

2 Selected Banks Net Inc Total Assets Deposits Net Inc NIM NII/Op Rev ($ in billions) Surp Assets QoQ QoQ QoQ QoQ QoQ JPMorgan Chase 16.1% $2, % 1.1% -6.9% 2bps -184bps Bank of America 13.9% $2, % -2.0% -92.7% 8bps -58bps Citigroup 2.1% $1, % -2.4% % 7bps -35bps Wells Fargo -0.6% $1, % 1.1% 2.9% -7bps -151bps Goldman Sachs 42.3% $ % 10.0% Morgan Stanley 21.0% $ % 5.7% -7.6% U.S. Bancorp -0.5% $ % -1.1% -1.5% -9bps 14bps BNY Mellon 5.7% $ % -6.2% 86.2% -3bps 20bps PNC 1.7% $ % 1.7% -1.3% -11bps 94bps Capital One -0.5% $ % -0.8% -9.5% 14bps -74bps State Street 12.1% $ % -5.0% -10.0% -4bps -50bps BB&T -1.3% $ % -0.5% 17.4% -2bps 10bps SunTrust 2.2% $ % 2.4% 42.9% -5bps -200bps Fifth Third -6.5% $ % 1.4% -22.6% -2bps -20bps Regions 2.5% $ % 0.3% 8.3% -2bps 103bps AVERAGE 7.3% $ % -0.3% 95.3% -1bps -41bps The recent market movements and low rates left management teams with more vague and less inspiring outlooks; some optimistic undertones stemmed from progress made over recent years. Basel III Capital Requirements Bank ($ in bln) Standardized Basel III Est. Tier 1 Common QoQ Change Advanced Basel III Est. Tier 1 Common QoQ Change JPMorgan Chase 10.5% 70bps 10.1% 30bps Bank of America 9.6% 10bps 9.6% -30bps Citigroup 11.1% 30bps 10.7% 10bps Wells Fargo 11.2% -15bps 10.5% 37bps Goldman Sachs 11.1% 20bps 11.8% 40bps Morgan Stanley 11.7% 100bps 12.6% 30bps U.S. Bancorp 9.0% 10bps 11.8% 10bps BNY Mellon 10.8% 50bps 10.0% 0bps PNC 10.1% 10bps 11.1% 10bps Capital One 12.7% 0bps >8.0% N/A State Street 10.1% -120bps 11.8% -100bps BB&T 10.3% 30bps N/A N/A SunTrust 9.7% 0bps N/A N/A Fifth Third 9.4% 10bps N/A N/A Regions 11.2% 20bps N/A N/A Source: Janney FISR; Company Reports; *Fifth Third and Regions missed Street earnings estimates, but the difference is likely NM; **We excluded Northern Trust from this report, as total assets reached above the $100B threshold in 4Q 2013, but has been below the mark historically; (1) fully phased-in 2019; (2) pro forma US rules Large Banks: 3Q Results Page 2

3 Citigroup anticipates a strong [2015 stress test] submission to the Fed, reminding us of its unsuccessful requests for shareholder remunerations previously. Large Banks: 3Q Results Page 3 Third Quarter Bank Earnings Summary: Company Synopsis Selected Banks JPMorgan Chase (A3/A/A+) Bank of America (Baa2/A- Citigroup (Baa2/A- Wells Fargo (A2/A+/ Net Inc Key Surp Positives 16.1% 13.9% 2.1% -0.6% Top and bottom lines beat Street estimates and improved from a year ago levels. Net income benefited from decreased legal expenses, which had brought 3Q 2013 net income into the red. In addition, net interest margin held steady from 2Q. The firm recorded 2% growth YoY in fixed income to offset the 1% decline YoY in equity activity. Asset quality improved further this quarter, and management expects total amount of net charge-offs to come in below prior guidance by year-end. Tier 1 common improved 40bps from 2Q. Earnings exceeded, but revenue met, analysts' guidance. Most business units recorded healthy growth or stability in revenue and earnings. Net interest margin expanded 8bps on less negative market-related adjustments and improved long-term debt costs, offsetting lower loan balances and yields. Net charge-offs stayed near recent lows, while nonperforming loans ticked down another 9bps. Basel III Tier 1 common (standardized approach) improved 10bps QoQ. Key Negatives Both net revenues and net income came in below last quarter s levels. Segmental earnings were mixed, with Corporate & Investment Bank and Commercial Banking bottom lines lower on QoQ and YoY bases. Mortgage production was down YoY on a double-digit drop in originations during the period. Noninterest expense crept up from 2Q, despite headcount trailing down again this quarter, and led to a weaker efficiency ratio. Distractions away from 3Q results included the recent data breach, but not a status update on CEO Dimon's health. Revenues shrank QoQ and YoY, both with and without debt valuation adjustments. The firm recorded $5.3B in pre-tax costs related to the DoJ settlement over mortgages malfeasance; noninterest costs rose, despite efforts. Consumer Real Estate Services remained a drain, even ex-doj charge; trimming delinquent mortgage loans was of importance. Average loans shrank vs. 2Q on pricing pressures and paydowns of real estate loans. Long-term debt rose on "opportunistic" offerings. The firm reported better-than-expected International Consumer Banking expenses top and bottom lines, and both revenue crept up on legal and repositioning charges. and net income grew with and without The firm indicated additional legal and DVA adjustments. Net interest margin compliance costs, along with heightened expanded 4bps QoQ on lower cost of cyber security. Mortgage delinquencies at funds. The bank is slowly nearing its target Citi Holdings still remain elevated, though efficiency ratios. "Bad Citi" Citi Holdings declined again this quarter. Fixed income was profitable this quarter and comprised revenues were softer QoQ. Management only 5% of the firm's total balance sheet. commented on plans for a "strong [2015 The firm looks to reduce exposure to stress test] submission" to the Fed, sensitive markets; it announced its Global reminding us of its unsuccessful requests Consumer Banking's exit from 11 regions. for shareholder remunerations previously. Both 3Q revenue and earnings met consensus estimates. Revenues bumped up 3.6% YoY both on higher net interest and noninterest income, with even mortgage banking fees improved from 3Q13. Average loan yield held steady for the third consecutive quarter, while average deposit cost remained at last quarter's low level. Loan growth YoY was from almost every type. Net charge-offs reached the lowest level in recent history and nonperforming assets below the 1% mark. Wholesale Banking was a drag on both top and bottom lines, and personnel costs rose for the segment. Net interest margin eked out 7bps QoQ from higher cash and shortterm investment balances. The efficiency ratio weakened from 2Q, but remained below the 3Q13 level and well within management's targeted range. The auto portfolio's quality softened on seasonality and aging. Basel III Tier 1 common (standardized approach) ticked down 15bps from 2Q on balance sheet growth.

4 Goldman Sachs commented on the recent volatility in relation to changes in regulatory requirements and the potential negative effect on market liquidity in the long run. Goldman Sachs (Baa1/A- Morgan Stanley (Baa2/A- U.S. Bancorp (A1/A+/ 42.3% 21.0% -0.5% The firm recorded another strong beat against analysts' projections for revenue and earnings. Net revenue expanded 25% YoY from fixed income and investment banking related business. Investment Management revenues benefited from higher management fees and assets under supervision. The firm balanced out lower revenue QoQ with a cut in operating expenses, including compensation and benefits. Assets under supervision expanded slightly from 2Q and meaningfully from a year ago level. Both revenue and earnings exceeded Street estimates. Solid Institutional Securities results came from YoY revenue growth for advisory, fixed income, and equities. Wealth Management recorded both QoQ and YoY revenue increases, thanks to higher asset management fee revenue. A YoY drop in non-compesation expense (decreased litigation costs) offset the rise in compensation expense. Basel III Tier 1 common (advanced approach) improved 30bps. Net revenues dropped 8% QoQ on weaker performance in all segments except Investment Management. Equity trading was down QoQ and YoY on lower comparative volatility and market volumes, while fixed income only QoQ on decreased activity. The weaker results a year ago made this year appear better in comparison. Management commented on the recent volatility in relation to changes in regulatory requirements and the potential negative effect on market liquidity in the long run. The top line was bolstered by positive DVA adjustments vs. negative a year ago. Income from continuing operations were softer QoQ (both with and without DVA adjustments). Investment Management revenue eroded on lower investment gains and carried interest in the Merchant Banking and Real Estate Investing businesses. Investment Banking, Trading, Investments, and Commissions and Fee revenues were all lower than 2Q levels. The European market remained weaker in 3Q. Top and bottom lines met analysts' Noninterest income fell QoQ on asset sale, expectations. Noninterest income and mortgage banking revenue dropped benefited from a rise in credit/debit QoQ and YoY. Despite slightly higher card and trust/investment management net interest income, net interest margin revenues. Healthy average loan growth of deteriorated by 10bps this quarter due to almost 6% (ex-charter One acquisition) lower rates on new loans and investments, was matched by a similar average deposit partially offset by lower funding costs. growth. Commercial real estate loans Management guided for additional 5-7bps contributed to the portfolio expansion. erosion in 4Q. The efficiency ratio ticked Asset quality improvements were seen up from higher occupancy, goodwill, and almost across the board, as net charge-offs professional fee expenses. The deposit mix and nonperforming assets dipped further. was less favorable this quarter. BNY Mellon (A1/A+/ 5.7% The bottom line surpassed expectations by almost 3 pennies. A rise in revenues QoQ and YoY was helped by a growth in fee revenue. Assets under management expanded by 7% YoY, and assets under custody by 3% thanks to higher equity market values, a stronger dollar, and net new business. Basel III Tier 1 common (advanced approach) held steady from last quarter at 10.0%. Total revenue adjusted for one-time items (e.g. gains on the sale of investments and property) edged down slightly YoY. The efficiency ratio weakened on a rise in professional and legal expenses, along with merger and restructuring costs. Nonperforming asset ratio increased 2bps QoQ from additions in the other residential mortgage loan portfolio, partially offset by sales of some portfolio assets. Large Banks: 3Q Results Page 4

5 State Street s management anticipates solid results driven by strength in core revenue, momentum in trading services, and a continued focus on expense management for FY2014. Capital One (Baa1/ BBB/A-) -0.5% PNC 1.7% (A3/A-/A+) State Street (A1/A+/ 12.1% BB&T -1.3% (A2/A-/A+) The firm met on both revenue and earnings. Net interest income grew QoQ, and noninterest income YoY. Noninterest expenses held steady QoQ and shrank YoY, due to decreased acquisition-related and amortization costs, among other operating expenses. Both net interest margin and the efficiency ratio improved this quarter, with net interest margin benefiting from one additional day in the quarter and a better loan mix. Net charge-offs ticked downward by 15bps from 2Q. Net interest income dropped slightly YoY, while noninterest income QoQ. Auto net charge-offs, nonperforming assets, and delinquency rates rose from 2Q. The auto loan growth was offset by a runoff in home loans, and contributed to the 4% decrease YoY in Consumer Banking revenue, which translated to weaker income from continuing operations. Management continues to be vague about its Basel III Tier 1 common (advanced approach), stating only that it was above the 8% target. PNC met consensus expectations for both Net interest margin crept down 11bps revenue and earnings, with a growth in in the quarter thanks to lower earning noninterest income offsetting a decline asset yields and securities balances due to in interest income. Total net income was higher cash balances at the Fed. Lower flattish QoQ and YoY, as management loan sales revenues led to less residential continued to control operating costs. Asset mortgage fee income. Management guided quality improved further this quarter, for "modest" loan growth (driven more so as seen through lower nonperforming by commercial than consumer), low single assets and nonaccrual ratios, along with digits increase in noninterest expense, and delinquencies. Basel III Tier 1 common a modest drop in net interest income for 4Q (fully phased-in) moved up 10bps QoQ to vs. 3Q, which will likely offset "stable" fee 10.1%. income. Earnings showed a double-digit beat over analysts' estimates, despite a slight meet for revenue. Revenue was flattish vs. 2Q and up almost 9% vs. 3Q13. The efficiency ratio strengthened on top line growth outpacing expenses. Eurozone exposure remains a minimal portion of the investment portfolio. Management anticipates "solid results driven by strength in core revenue, momentum in trading services, and a continued focus on expense management" for FY2014. Seasonal effects caused noninterest revenue (securities finance revenue and processing fees) to decline QoQ, despite rising YoY. Net interest margin was pressured further by the low rate environment, resulting in a 5bps decline from 2Q. Noninterest expenses rose QoQ and YoY on higher transaction processing services and occupancy costs. The deposit mix weakened from last quarter. Basel III Tier 1 common declined after $410MM in share buybacks this quarter. The firm recorded a meet against Net interest margin dropped from lower consensus for both revenue and earnings. yields on new loans and runoff of covered Mortgage banking income grew QoQ on assets. The efficiency ratio weakened, higher volumes, despite declining YoY. despite a smaller headcount. The firm The bank saw loan expansion QoQ in for remains strategic, offloading a loan all assets except residential mortgages, portfolio, extinguishing FHLB advances, which was partially the result of loan sales. and announcing the purchase of 41 Texas The growth QoQ in noninterest bearing branches from Citigroup for $2.3B and deposits outpaced interest bearing deposit Bank of Kentucky for $1.9B. Net chargeoffs bumped up from historical lows on growth. Nonperforming loans shrank, predominantly the result of commercial one-time items, and the firm sees the ratio nonperforming loans declining. slightly higher in 4Q on seasonal effects. Large Banks: 3Q Results Page 5

6 Fifth Third anticipates for FY2014 vs. FY2013 modest net interest income growth, but lower net interest margin, a double-digit decrease in noninterest income, mid-single digit noninterest expense decline, and sizable drops in net chargeoffs and nonperforming assets. SunTrust (Baa1/ BBB+/ BBB+) Fifth Third (Baa1/ BBB+ Regions Financial (Ba1/BBB-/ BBB) 2.2% -6.5% 2.5% Earnings outperformed consensus by two pennies. Net interest income grew QoQ and YoY on earning asset growth, which offset loan yield declines. The efficiency ratio improved QoQ, thanks to cost-cutting efforts, lower cyclical expenses, and the sale of investment management firm RidgeWorth. Management guided that it expects to meet its FY2014 efficiency ratio target. Nonperforming loans ticked down 11bps QoQ, and performing loan growth came from C&I, CRE, and consumer loans. Noninterest income dropped, due to lower investment banking, trust and investment management, and mortgage production income. Net interest margin eroded by 4bps QoQ and 16bps YoY from lower loan yields. Earnings were skewed due to onetime items, but otherwise were below the 2Q level. Net charge-offs increased after two quarters of being at historical lows, but still remained relatively low. The tangible common equity ratio shrank, despite Basel III Tier 1 common holding steady from 2Q. The efficiency ratio strengthened on Revenue and earnings missed Street reduced headcount at branches. A growth estimates, as flattish net interest and in C&I loans offset a drop in commercial lower noninterest income carried through mortgages, while consumer loan growth the income statement, partly the result of came from residential mortgages and one-time items. Net interest margin was bankcard. Basel III Tier 1 common 2bps lower than 2Q, due to the effects improved 10bps, despite $225MM in share of loan repricing, debt issuance, and day buybacks announced in 3Q. Management count. The deposit mix had a modest anticipates for FY2014 vs. FY2013 modest unfavorable shift this quarter. The firm net interest income growth, mid-single guided for FY2014 vs. FY2013 lower net digit noninterest expense decline, and interest margin and double-digit decrease sizable drops in net charge-offs and in noninterest income (thanks to mortgage nonperforming assets. sale). The firm beat Street earnings estimates by a penny and met for revenue. The efficiency ratio improved, thanks to noninterest expenses holding steady QoQ, despite a rise in headcount and compensation; management sees FY2014 better than FY2013. Nonperforming loan and troubled debt restructuring balances declined further, but were still elevated vs. peer levels. Basel III Tier 1 common came in at 11.2%, 20bps up from 2Q. The top line declined 1.5% YoY on lower noninterest income, but expanded 1.6% QoQ. Net interest margin deteriorated further on higher cash levels and lower asset yields; management guided for modest compression of margin in 4Q. Net charge-offs bumped up slightly, but still remained near historical lows. The firm guided for loan growth at the lower end of its 3-5% projected range. The firm plans on executing $350MM share buyback soon. Large Banks: 3Q Results Page 6

7 Analyst Certification I, Jody Lurie, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Janney Montgomery Scott LLC ( Janney ) Debt Research Disclosure Legend Janney may seek compensation for investment banking services for any company listed in this report in the next 3 months. The research analyst is compensated based on, in part, Janney s profitability, which includes its investment banking revenues. Additional information available upon request. Definition of Issuer/Company Outlooks Janney FIS employs a rating system which considers the company, but not any specific debt or equity securities of the company and is not making a recommendation with regard to any specific debt securities of the company. Outlooks reflect our opinion about how credit factors of the company may affect its credit rating(s). Positive: Janney FIS believes there are factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades. Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades. Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrades. Definition of Sector/Industry Ratings Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in terms of total return. Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset class in terms of total return. Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return. Janney FIS Outlooks Distribution as of 10/28/2014 IB Serv./Past 12 Mos. Outlook Count Percent Count Percent Positive Stable Cautious Negative Benchmarks Asset Classes: Janney FIS ratings for domestic fixed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the Barclay s U.S. Aggregate Bond Market Index as a benchmark. Treasuries: Janney FIS ratings employ the Barclay s U.S. Treasury Index as a benchmark. Agencies: Janney FIS ratings employ the Barclay s U.S. Agency Index as a benchmark. Mortgages: Janney FIS ratings employ the Barclay s U.S. MBS Index as a benchmark. Investment Grade Credit: Janney FIS ratings employ the Barclay s U.S. Credit Index as a benchmark. High Yield Credit: Janney FIS ratings for employ Barclay s U.S. Corporate High Yield Index as a benchmark. Municipals: Janney FIS ratings employ the Barclay s Municipal Bond Index as a benchmark. Disclaimer Janney or its affiliates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income Strategy & Research (Janney FIS). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney s express prior written consent. This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney FIS publications change. Janney Fixed Income Strategy does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor s circumstances and objectives. For investment advice specific to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Consultant and/or your tax or legal advisor. Large Banks: 3Q Results Page 7