US Banks Q2 Preview: Results Overshadowed by Deteriorating Outlook; Downgrading BBT

Transcription

1 July 11, 2016 Baird Equity Research Financial Institutions US Banks Q2 Preview: Results Overshadowed by Deteriorating Outlook; Downgrading BBT We think the banks will trade in line/modestly underperform through Q2 earnings. Second quarter results should be largely in line, but the significant flattening in the yield curve and change in Fed tightening expectations should lead to more conservative guidance and negative EPS revisions. Bank stocks are not especially cheap if global interest rates remain this low and would likely underperform in this macro environment. We are waiting until the stocks discount more credit/recession risk before adding to positions, and therefore are lowering BBT to Neutral. No need to chase the banks in a broader market rally if interest rates remain this low. Better trading and mortgage results should be the highlights from the mega-caps and super regionals leading off bank reporting (JPM/WFC/BAC), and more stable asset quality trends should help the regionals trading near/below TBV and card names. However, NIM compression may now extend well into 2017, and we would use market volatility to buy banks at lower prices. Reducing estimates, 2017E EPS are ~5% below consensus. We removed the benefit from 1-2 Fed rate hikes through 2017 in our estimates and now reflect a steady grind lower for NIMs, which is more consistent with a lower-for-longer rate outlook. Downgrading BBT to Neutral. BBT is better positioned than most banks for an extended low-rate environment with its diversified business mix (+40% fees), strategy (steady organic growth, opportunistic M&A), and high-quality management team. However, the risk/reward looks more balanced though with shares trading at ~12x our revised 2017E EPS of $2.95 vs. ~10.5x peer median. Synergies from the recent SUSQ and NPBC acquisitions provide some earnings visibility, but the NIM will likely compress from the current ~3.40% level and make reaching the ~56%-57% efficiency ratio target by the end of 2016 challenging. BBT s ~3.2% dividend yield limits downside, but given the valuation premium and the industry s fundamental headwinds, we are waiting for a larger pullback before increasing positions. Fundamental highlights from Q2 results: - Positives: Loan growth steady Y/Y despite macro worries (+6.5%), less credit reserve build (helped by rally in oil) could be a source of modest Q2 upside, market volatility should drive better trading results, we estimate mortgage banking revenue +25% Q/Q given stronger origination activity and wider production margins (+8 bps Q/Q). - Negatives: NIMs -3 bps Q-Q given sharp yield curve flattening and guidance should be cautious given lower reinvestment rates for securities, banks need to more aggressively manage expenses to bolster operating leverage (median efficiency ratio stable Y/Y at 64.5%). [Please refer to Appendix - Important Disclosures and Analyst Certification] David A. George, Sr. Research Analyst dgeorge@rwbaird.com Garrett A. Holland, Sr. Research Associate gholland@rwbaird.com Timothy J. Switzer, Research Analyst tswitzer@rwbaird.com

2 Prices as of 07/08/16 Market Cap (mil) Rating Target F2015 F2016 F2017 COMPANY TICKER - PRICE Current Prior Current Prior Current Prior Current Prior Associated Banc-Corp $2,549 N/H ASB - $ Bank of America $146,187 O/H BAC - $ BB&T Corp. $27,824 N/H BBT - $35.22 O/H Capital One Financial Corporation $33,649 O/H COF - $ Citizens Financial Group Inc. $10,918 N/H CFG - $ Comerica, Inc. $7,304 O/H CMA - $ Fifth Third Bancorp $14,645 N/H FITB - $ Huntington Bancshares Inc. $7,281 N/H HBAN - $ JP Morgan Chase & Co. $225,927 O/H JPM - $ KeyCorp $9,415 N/H KEY - $ M&T Bank Corp. $18,434 U/A MTB - $ PNC Financial Services $42,326 O/H PNC - $ PrivateBancorp, Inc. $3,463 N/H PVTB - $ Regions Financial Corp. $10,896 N/H RF - $ SunTrust Banks, Inc. $20,969 N/H STI - $ Synovus Financial Corp $3,770 N/H SNV - $ U.S. Bancorp $70,037 N/H USB - $ Wells Fargo & Company $249,512 N/H WFC - $ Zions Bancorporation $5,022 N/H ZION - $ Current Prior 2

3 Q2 Preview: Results Overshadowed by Deteriorating Outlook; Downgrading BBT to Neutral We think the banks will trade in line/modestly underperform through Q2 earnings. Second quarter results should be largely in line, but the significant flattening in the yield curve and change in Fed tightening expectations should lead to more conservative guidance and negative EPS revisions. Bank stocks are not especially cheap if global interest rates remain this low and would likely underperform in this macro environment. We are waiting until the stocks discount more credit/recession risk before adding to positions, and therefore are lowering BBT to Neutral. No need to chase the banks in a broader market rally if interest rates remain this low. Better trading and mortgage results should be the highlights from the mega-caps and super regionals leading off bank reporting (JPM, WFC, BAC), and more stable asset quality trends should help the regionals trading near/below TBV and card names (COF). However, NIM compression may now extend well into 2017, and we would use market volatility to buy banks at lower prices. Our favorite longer-term ideas are BAC (expectations are lower with shares at ~0.8x TBV, fees account for ~50% of revenue) and CMA (we think the efficiency program could be up to ~$80M-$100M or +10% accretive to EPS over 2-3 years, and we like the company s M&A optionality over time). Other Outperform-rated names include PNC, JPM, and COF. We remain comfortable with the Underperform on MTB which trades at ~13x 2017E EPS vs. the ~10.5x peer median. The risk/reward is looking more compelling for HBAN after recent weakness (now one of the least expensive regional banks at ~10x 2017E EPS and carries a ~3.8% dividend yield). Downgrading BBT to Neutral. BBT is better positioned than most banks in a lower-for-longer rate environment with its diversified business mix (+40% fees), strategy (steady organic growth and opportunistic M&A), and high-quality management team. However, the risk/reward looks more balanced though with shares trading at ~12x our revised 2017E EPS of $2.95 vs. the large-cap bank peer median of ~10.5x. Synergies from the recent SUSQ and NPBC acquisitions provide better-relative earnings visibility, but the NIM will likely compress from the current ~3.40% level and make reaching the ~56%-57% efficiency ratio target by the end of 2016 challenging. BBT s ~3.2% dividend yield limits downside, but given the valuation premium and the industry s fundamental headwinds, we are waiting for a larger pullback before increasing positions. Volatile quarter for the BKX, deteriorating rate outlook weighing on the banks. The BKX increased ~1% Q/Q but weakened throughout quarter with the flattening yield curve (+8% in April, +3% in May, -8% in June), and underperformed the S&P 500 by ~3.2%. Top performing stocks under coverage included PVTB (+14%), STI (+14%), CMA (+9%), RF (+8%), and BBT (+7%) while COF (-8%), HBAN (-6%), and CFG (-5%) lagged most. Bank EPS were largely unchanged Y/Y in Q216. We estimate pre-provision earnings increased ~9% Y/Y driven by ~4% revenue growth (NII +6%, fees unchanged) with modest expense growth (expenses +1.5% Y/Y). Provisioning for credit losses should moderate to ~0.39% of loans vs. 0.44% in Q116 (up from 0.28% in Q215). Our Q216 EPS estimates are largely in line with consensus while our 2017 estimates are ~5% below the Street; the 2017E variance largely reflects our more conservative interest rate outlook (no rate hikes, persistently flat yield curve). Other key fundamental themes include: Loan growth steady overall Y/Y. Underlying demand is stable with core loans at large U.S. commercial banks (ex-other & closed-end resi and acquisition impacts) trending +6.5% Y/Y for the past three months. Large bank core C&I growth has stabilized at ~7.5% but continues to outpace C&I growth by the smaller banks (+4% Y/Y). Large bank CRE loan growth modestly improved in Q216 to +11% Y/Y vs. +10% in Q116; this level of CRE loan growth seems unsustainable, in our view. Company updates on Q216 loan growth were mixed. USB said loan growth was tracking above prior guidance (previously +1.5% Q/Q), and BBT expected core loan growth at the higher end of the guidance range (previously 1%-3% Q/Q annualized). CMA s average loans increased 2% Q/Q through May, while RF noted that 2016 loan growth was tracking closer to the low end of its previous 3%-5% guidance range given softness in lending pipelines and more selective underwriting. 3

4 Q2 Preview: Results Overshadowed by Deteriorating Outlook (continued) Securities growth improved Q/Q despite the decline in rates with stronger demand from foreign banks. Total securities for large U.S. commercial banks increased 2% Q/Q vs. +1% in Q116 (+7% Y/Y in June vs. +6% in March). Securities growth for foreign-related institutions accelerated to +10% Q/Q vs. +4% in Q116 (+20% Y/Y in June vs. +12% in March). Large bank average earning asset growth was fairly steady at +1.7% Q/Q (+6.9% Y/Y) vs. +1.6% in Q116. Core deposit growth picked up slightly. Core deposits for the large U.S. commercial banks increased 4% Y/Y through June vs. +2.5% in March. NIM outlook challenging. We assume a median ~3 bps of NIM compression Q/Q. Both BBT and USB tempered Q2 NIM guidance during the quarter following the sharp flattening in the yield curve. The average 10 Yr. UST yield has declined ~17 bps Q/Q but has dropped ~50 bps since the start of June to all-time lows. The average 3M LIBOR five-year UST spread compressed ~15 bps Q/Q, and the 2-10 year UST spread is at the lowest level since Capital markets revenue modestly recovered in Q2. We think markets activity may positively surprise in Q2 given the recent improvement in market conditions (higher asset prices and higher volatility) combined with low investor expectations. JPM noted that markets revenue was tracking up mid teens Y/Y in Q216 through May (for perspective, Q215 was weaker and -1% Y/Y on a core basis); trading momentum from March continued in April and May with better client activity in fixed income and slightly lower activity in equities. Brexit-related volatility and improving FX/rate volumes likely extended these trends in June, in our view. BAC characterized trading results from April and May as solid, and markets revenue was tracking up mid-single digits Y/Y (fixed income revenue growing while equities revenue was trending lower). Consensus estimates currently assume flattish Y/Y trading revenue for both JPM and BAC. We estimate primary dealer fixed income trading volume was down ~5% Q/Q but roughly flat Y/Y. Corporate bond trading volume climbed 15% Y/Y led by better high-yield activity (+20% Y/Y). FICC-related futures declined ~10% Q/Q but rose 10% Y/Y. Investment banking volume picked up from depressed Q1 levels but remains significantly lower Y/Y for M&A (announced volume -30% Y/Y) and equity issuance (-45%) while fixed income underwriting has recovered (+10% Y/Y). Pullback in interest rates a big help for mortgage production. The average MBA total mortgage application increased 17% Q/Q (+20% Y/Y) due to both stronger refi (+11% Q/Q, +26% Y/Y) and purchase (+26% Q/Q, +14% Y/Y) originations. Gain-on-sale production margins increased ~8 bps Q/Q. Our Q216 estimates assume a ~25% increase in total mortgage revenue Q/Q. Median efficiency ratio stable Y/Y. We estimate the median efficiency ratio for our coverage will be stable Y/Y at ~64.5% but modestly increase vs. the ~64% level in Q116. Unrealized securities gains increased $8.6B Q/Q to $23.7B. Banks likely monetized some gains during the recent fall in long-term interest rates. Rally in oil should help lower provision run-rates. Energy credit concerns are fading as crude oil increased to ~$45/bbl from the average Q116 price of $33/bbl. Furthermore, high-yield credit spreads compressed ~130 bps Q/Q which reflects less energy stress and lower perceived recession risk. Recall banks increased energy loss reserves near ~8% in Q116 to reflect an extended period of ~$25-30 oil/bbl. Lower credit costs looks like a potential source of modest EPS upside in Q216. 4

5 EPS Revisions: Change in Rate Outlook Should Pressure Earnings Estimates We removed the benefit from 1-2 Fed rate hikes through 2017 in our estimates and now reflect a steady grind lower in NIMs, which is more consistent with a lower-for-longer rate outlook. Selective increases in estimates reflect lower credit costs (ZION and STI) and better trading results (JPM). Overall, our Q216 EPS estimates are in line with consensus while our 2016 estimates and 2017 estimates are 1% and 5% below the Street, respectively. Baird EPS Estimates Relative To the Street Q216E 2016E 2017E Baird Estimates Baird Estimates Baird Estimates Ticker Revision Current Previous Street % Delta Revision Current Previous Street % Delta Revision Current Previous Street % Delta ASB $0.31 $0.32 $0.31 0% $1.21 $1.23 $1.21 0% $1.25 $1.35 $1.32 (5%) BAC $0.32 $0.32 $0.36 (11%) $1.20 $1.24 $1.29 (7%) $1.45 $1.50 $1.56 (7%) BBT $0.62 $0.70 $0.66 (6%) $2.71 $2.71 $2.78 (3%) $2.95 $3.00 $3.16 (7%) COF $1.77 $2.01 $1.89 (6%) $7.50 $7.60 $7.49 0% $7.85 $8.10 $8.14 (4%) CFG $0.43 $0.49 $0.44 (2%) $1.77 $1.80 $1.80 (2%) $1.95 $2.00 $2.07 (6%) CMA $0.69 $0.73 $0.69 0% $2.48 $2.48 $2.49 (0%) $3.05 $3.15 $3.18 (4%) FITB $0.37 $0.41 $0.38 (3%) $1.58 $1.59 $1.56 1% $1.62 $1.65 $1.70 (5%) HBAN $0.21 $0.21 $0.21 0% $0.81 $0.84 $0.84 (4%) $0.89 $0.95 $0.94 (5%) JPM $1.45 $1.43 $1.44 1% $5.50 $5.59 $5.65 (3%) $6.05 $6.10 $6.32 (4%) KEY $0.28 $0.30 $0.28 0% $1.05 $1.08 $1.08 (3%) $1.20 $1.25 $1.30 (8%) MTB $2.04 $2.10 $2.09 (2%) $8.00 $8.00 $8.27 (3%) $8.80 $8.80 $9.06 (3%) PNC $1.76 $1.81 $1.76 0% $7.12 $7.20 $7.14 (0%) $7.50 $7.75 $7.66 (2%) PVTB $0.62 $0.63 $0.62 0% $2.50 $2.50 $2.55 (2%) $2.60 $2.65 $2.76 (6%) RF $0.20 $0.21 $0.21 (5%) $0.82 $0.82 $0.83 (1%) $0.87 $0.92 $0.92 (5%) SNV $0.47 $0.48 $0.47 0% $1.85 $1.85 $1.87 (1%) $1.98 $2.00 $2.11 (6%) STI $0.87 $0.85 $0.88 (1%) $3.44 $3.40 $3.49 (1%) $3.55 $3.55 $3.66 (3%) USB $0.80 $0.87 $0.81 (1%) $3.25 $3.35 $3.28 (1%) $3.35 $3.55 $3.52 (5%) WFC $1.02 $1.06 $1.01 1% $4.00 $4.10 $4.09 (2%) $4.15 $4.35 $4.36 (5%) ZION $0.41 $0.45 $0.41 0% $1.75 $1.70 $1.77 (1%) $1.95 $1.95 $2.19 (11%) Median 0% (1%) (5%) Source: Factset, Baird estimates 5

6 Quick Thoughts on Q2 Expectations for Our Coverage Summary Comments for Q216 Earnings Expectations: Baird Large/Mid-Cap Banks Q216 Estimates Ticker Baird Street $ Delta % Delta ASB $0.31 $0.31 $0.00 0% Quick Thoughts on Quarterly Results Lower energy provisioning should offset any NIM shortfall in Q216, but there is more risk to 2017E NIM expectations given greater relative mortgage and securities exposure; we see better value in regionals trading near TBV, but M&A optionality should limit downside. BAC $0.32 $0.36 ($0.04) (11%) BBT $0.62 $0.66 ($0.04) (6%) COF $1.77 $1.88 ($0.11) (6%) CFG $0.43 $0.44 ($0.01) (2%) CMA $0.69 $0.69 $0.00 0% FITB $0.37 $0.38 ($0.01) (3%) HBAN $0.21 $0.21 $0.00 0% JPM $1.45 $1.44 $0.01 1% KEY $0.28 $0.28 $0.00 0% MTB $2.04 $2.08 ($0.04) (2%) PNC $1.76 $1.76 $0.00 0% The estimated FAS 91 accounting charge (~$0.9B) is the primary driver of the variance vs. consensus; the flattening yield curve and change in tightening outlook should weigh on 2017 consensus estimates, but these headwinds seem largely discounted with shares trading at ~0.8x TBV. BAC will likely accelerate cost cutting to improve operating leverage. Operating leverage should improve as synergies from SUSQ and NPBC (closed 4/1) are realized, but the company's valuation premium (12x 2017E EPS vs. 10.5x peer median) and downside to Street NIM expectations should limit upside for shares. Q2 core loan growth was tracking ahead of expectations (prior guidance +1%-3% annualized), but the NIM 2H16/2017 outlook is now more challenging (Q216 expected to be <3.40%). Our estimate includes merger integration charges and likely accounts for the variance vs. consensus. Higher provisioning and expenses are the primary sources of variance for our Q216 estimate vs. consensus. The SYF credit guidance change worried investors, but steady credit (previous outlook: domestic card NCOs of ~4% for 2016 and in the low 4%s for 2017) and efficiency ratio guidance (previous outlook: modest improvement in the efficiency ratio in 2016/2017) should help shares retrace higher. Card yields should be more stable in a lower-for-longer rate environment, and the risk/reward looks good at ~1.1x TBV and ~8x 2017E EPS. Look for more progress with the TOP II efficiency initiative (on track to deliver a $90M-$115M annual pre-tax benefit by the end of 2016) and detail on the next round of the program (TOP III was referenced in the quarter and should target incremental efficiencies, balance sheet management, cross-sell, and tax-rate planning). Returns should continue to lag peers, but expectations are low at ~0.8x TBV. Loan growth should seasonally improve (tracking +2% Q/Q through May) and energy credit quality should stabilize with the rally in oil. Investor focus will be on the details of the company's GEAR Up! efficiency program which will be announced in conjunction with Q216 results. Based on the average size of other bank cost savings programs and CMA s prior efficiency initiative ($100M), we think this next efficiency target could be up to ~$100M (~5% of expenses, ~$0.40/sh to EPS, adds ~1% to ROTCE). Accretion from the efficiency program should help offset less help from Fed tightening. Operating leverage should be weaker in Q216 given seasonally higher expenses and strategic investments. Look for more discussion on reinvestment risk for the securities portfolio which had the highest yield on our coverage list at 3.19% in Q116 (29% of debt securities invested in CMBS vs. 5% peer median). Expectations are lower overall, and the VNTV stake remains attractive (~18% interest). HBAN was one of the worst performing regionals in Q216 (-6%), and the risk/reward looks more interesting for shares at ~10x 2017E EPS. We still like the FMER acquisition, and concerns about deteriorating auto credit quality (auto accounts for 19% of loans) seem overdone given HBAN's super prime focus and conservative underwriting (765 FICO, 88% LTV, ~0.82% cum. loss estimate for originations in Q116). We think markets revenue will likely beat expectations (markets revenue was tracking up mid-teens Y/Y in Q216 through, and JPM likely benefited from the June spike in currency volatility). JPM should weather this challenging operating environment by taking share from capital markets peers and sustaining investment spending to drive growth/operating efficiency. JPM s forward P/E valuation has reached the highest level vs. peers post crisis, but steady growth in book value and capital deployment (dividend yield >3%) should drive attractive total return upside for shares. Q216 results should be largely in line with expectations though investment banking revenue may be a bit soft given the industry weakness during the quarter. Shares look more compelling following the 16% YTD decline and now trade at just ~9x 2017E EPS vs. the 10.5x large-cap median. Slightly lower NII and higher expenses account for the variance vs. consensus. The $1.15B buyback authorization in the 2016 capital plan was larger than expected and offset our assumption for more NIM compression in MTB is a high-quality bank, and we expect steady progress integrating HCBK. However, these positives are largely reflected in the price with shares trading at ~13x 2017E EPS, a ~25% premium to peers. Shares remain rated Underperform. Q216 NII should be largely stable but the ~10%-12% Q/Q growth in fee income should be the highlight in the quarter. The 2016 revenue guidance will likely be revised closer to flattish without the June rate hike, and we look for more detail on any changes to securities reinvestment plans as PNC had been less aggressive in deploying liquidity. PVTB $0.62 $0.62 $0.00 0% Following the proposed acquisition by CIBC, downside risk for shares largely relates to any issues with regulatory approval for the transaction (expected to close in Q117). RF $0.20 $0.21 ($0.01) (5%) Lower NII is the most likely source of Q216 downside vs. consensus given sluggish loan growth (management noted 2016 loan growth tracking closer to low end of previous 3%-5% guidance range) and the likely increase in premium amortization. Lower credit costs and better fee production may help offset the weaker NII outlook for 2H16. SNV $0.47 $0.47 $0.00 0% We expect steady results from SNV with mid-single-digit loan growth and a tempered NIM outlook. Shares seem to discount a modest M&A premium trading at 14.5x 2017E EPS vs. the ~13x peer median. STI $0.87 $0.88 ($0.01) (1%) USB $0.80 $0.81 ($0.01) (1%) WFC $1.02 $1.01 $0.01 1% ZION $0.41 $0.41 $0.00 0% Source: Factset, Baird estimates Lower NII is the primary variance vs. consensus as loan growth should slow vs. Q1 and the NIM is biased lower. Fees could top expectations as solid mortgage banking results offset any softness in IB revenue. STI has executed well but shares look fully valued at ~12x 2017E EPS vs. the 10.5x peer median. Management noted loan growth was tracking ahead of the 1.5% Q/Q guidance, but consensus does not seem to reflect the updated guidance for 3-5 bps of sequential NIM compression given the yield curve flattening. Strength in mortgage results (+20%-30% Q/Q) should be a highlight in Q2, but expense growth (~4% Q/Q) should result in a largely stable efficiency ratio. Mortgage banking results should be strong in Q216 (~8% of total revenue) and carry into 2H16 as WFC recognizes revenue at loan funding vs. rate lock like most banks. WFC also deserves credit for more aggressively managing its asset sensitivity and deploying liquidity when the 10 Yr. UST was ~100 bps higher. The dividend yield is attractive at 3.2%, and we look to get more constructive on a larger pullback. Lower credit provisioning is the most likely source of Q216 upside given the rally in oil. Deterioration in the interest rate outlook may also pressure the company's efficiency program targets (efficiency ratio 66% in 2016, and in the low 60%s by 2017 vs. ~68.5% in Q116). NII guidance will likely be weaker, but excess capital (estimated near ~30% of market cap) should limit downside for shares. 6

7 Baird Large/Mid-Cap Bank Earnings Calendar Reporting Period: Q216 Data from 7/08/2016 Baird Large/Mid-Cap Banks Ticker Expected Release Date Release Time (EDT) Conf. Call Time (EDT) Baird Est. Street Cons. Delta vs. Street Street Range Low - High Q116 Reported Conf. Call # Password JPMorgan Chase & Co. JPM 07/14/2016 6:45 AM 8:30 AM $1.45 $1.44 $0.01 $1.33 $1.54 $1.35 U.S. Bancorp USB 07/15/2016 Before Market 9:00 AM $0.80 $0.81 ($0.01) $0.78 $0.85 $ PNC Financial Services PNC 07/15/2016 Unspecified 11:00 AM $1.76 $1.76 $0.00 $1.69 $1.83 $ Wells Fargo & Company WFC 07/15/2016 8:00 AM 11:30 AM $1.02 $1.01 $0.01 $0.94 $1.08 $ Bank of America Corporation BAC 07/18/2016 6:45 AM 8:30 AM $0.32 $0.35 ($0.03) $0.28 $0.40 $ Comerica Incorporated CMA 07/19/2016 Before Market 8:00 AM $0.69 $0.69 $0.00 $0.63 $0.72 $0.34 (877) Synovus Financial Corp. SNV 07/19/2016 Unspecified 8:30 AM $0.47 $0.47 $0.00 $0.44 $0.49 $0.41 Regions Financial Corp. RF 07/19/2016 Before Market 11:00 AM $0.20 $0.21 ($0.01) $0.19 $0.22 $ M&T Bank Corporation MTB 07/20/2016 Before Market 11:00 AM $2.04 $2.08 ($0.04) $2.00 $2.20 $1.87 (877) BB&T Corporation BBT 07/21/2016 Before Market 8:00 AM $0.62 $0.66 ($0.04) $0.61 $0.73 $ Citizens Financial Group, Inc. CFG 07/21/2016 7:00 AM 8:30 AM $0.43 $0.44 ($0.01) $0.41 $0.46 $0.41 (800) Huntington Bancshares Incorporated HBAN 07/21/2016 Before Market 9:00 AM $0.21 $0.21 $0.00 $0.20 $0.23 $0.20 (844) Associated Banc-Corp ASB 07/21/2016 After Market 5:00 PM $0.31 $0.31 $0.00 $0.28 $0.33 $ Capital One Financial Corporation COF 07/21/2016 4:05 PM 5:00 PM $1.77 $1.88 ($0.11) $1.78 $2.01 $1.84 SunTrust Banks, Inc. STI 07/22/2016 Unspecified 8:00 AM $0.87 $0.88 ($0.01) $0.84 $0.93 $ Q16 KeyCorp KEY 07/26/2016 Before Market 9:00 AM $0.28 $0.28 $0.00 $0.24 $0.30 $0.22 (800) Fifth Third Bancorp FITB 07/28/2016 6:30 AM 9:00 AM $0.37 $0.38 ($0.01) $0.36 $0.43 $0.37 (888) Zions Bancorporation ZION $0.41 $0.41 $0.00 $0.38 $0.46 $0.38 PrivateBancorp, Inc. PVTB $0.62 $0.63 ($0.01) $0.61 $0.64 $0.62 Monday 11 July Tuesday Wednesday Thursday Friday JPM - 8:30 ET USB - 9:00 ET PNC - 11:00 ET WFC - 11:30 ET BAC - 8:30 ET 18 CMA - 8:00 ET SNV - 8:30 ET RF - 11:00 ET MTB - 11:00 ET BBT - 8:00 ET CFG - 8:30 ET HBAN - 9:00 ET ASB - 5:00 PM ET COF - 5:00 PM ET STI - 8:00 ET KEY - 9:00 ET FITB - 9:00 ET 29 Source: Factset, Baird estimates 7

8 & Associated Banc-Corp (ASB) ASB shares currently trade at ~14x 2017E EPS, slightly above the mid-cap bank peer median (~13.5x). Our $17 price target assumes shares trade at ~13.5x 2017E EPS, mostly in line with historical levels (~12x-13x) as better relative growth is mitigated by lower relative returns (vs. historical levels). Weaker-than-expected net interest margin trends and loan growth are the primary risks to our investment outlook. Bank of America (BAC) BAC shares are currently trading at ~0.8x tangible book value, which is a discount to large-cap peers (~1.2x TBV). Our $17 price target assumes shares trade near ~1x 2016E TBV, a discount to the historical multiple (~2x) given weaker returns on capital and limited revenue growth visibility. Financial regulatory reforms, secular deleveraging trends, and market share loss across business lines could depress profitability and permanently impair BAC s earnings power. BB&T Corp. (BBT) Shares are trading near ~11.5x 2017E EPS, a warranted premium to the median large-cap bank multiple (~10x) given BBT s solid pre-provision returns, competitive positioning, and better relative capital deployment opportunities. Our $37 price target assumes shares trade near ~12.5x our 2017E EPS, below its historical earnings multiple (~13x). Decelerating loan growth along and NIM compression are key risks to earnings estimates. A large dilutive acquisition would also likely pressure BBT shares. Capital One Financial Corporation (COF) Shares are currently trading at ~8.5x 2017E EPS, which is a discount to large-cap bank peers (~10x median) despite COF s better relative returns. Our $78 price target assumes shares trade near 10x 2017E EPS, at the bottom end of the historical forward multiple range (10x-11x). Rising unemployment claims and a deteriorating labor market would likely lead to higher consumer credit losses and negative EPS revisions. Citizens Financial Group Inc. (CFG) Shares trade at a discount on P/TBV (~0.75x vs. ~1.2x large-cap median) which is justified given CFG's lagging ROTCE (~6.6% in Q116 vs. ~11% peer median). Our $24 price target assumes CFG trades at ~0.9x 2016E tangible book value per share. Aggressive competition that pressures NIM, loan growth and credit trends all represent risks. 8

9 Comerica, Inc. (CMA) Our $50 weighted-average price target assumes a 70% weighting for the traditional target of $46 (~1.1x 2016E TBV, in line with the median P/TBV multiple post crisis) and 30% weighting for a ~$60 target in an M&A scenario (~1.5x P/TBV, in line with recent regional bank transactions). to our investment outlook include: the efficiency program in development fails to deliver improving operating leverage, the probability of a sale declines, and energy-related loan losses sharply increase. Fifth Third Bancorp (FITB) Shares are trading at ~9.5x 2017E EPS, slightly below the large bank median (~10x). Our $19 price target assumes shares trade near ~11.5x 2017E EPS, a discount to the historical multiple (~12x-13x) given the challenging operating environment. NIM compression and decelerating loan growth represent risks to FITB s pre-provision earnings outlook and valuation. Huntington Bancshares Inc. (HBAN) HBAN shares are currently trading at ~10x 2017E EPS vs. the ~13.5x large/mid-cap bank peer median. Our $10 price target assumes shares trade near ~11x 2017E EPS, slightly below the historical multiple (~12x). Aggressive competition in the company s Midwest footprint could pressure NIM, loan growth, and credit trends over time. JP Morgan Chase & Co. (JPM) Shares are trading at ~1.2x TBV (near the large-cap median) despite better relative returns and growth opportunities. Our $68 price target assumes shares trade near ~1.3x 2016E TBV, a discount to the historical median (~2x) given regulatory scrutiny and the more volatile market environment. Weaker capital market conditions, the low-interest-rate environment, and litigation/regulatory compliance costs could reduce earnings/returns more than expected. KeyCorp (KEY) We believe the risk/reward is balanced with shares trading at ~1.2x pro forma tangible book value following the FNFG acquisition vs. ~1.2x large-cap peer median. Our $13 price target assumes shares trade near 1.35x 2016E TBV, a discount to the historical multiple (~2x) given the challenging revenue outlook. Decelerating loan growth and NIM compression are key risks to earnings estimates and delays/distraction related to the proposed FNFG acquisition could negatively affect shares. 9

10 M&T Bank Corp. (MTB) MTB is currently trading at a ~25% premium to large-cap peers (~13x 2017E EPS vs. ~10.5x peer median). Our $115 price target assumes shares trade near ~13x our 2017 EPS estimate, a discount to its historical average multiple (~14x) given the challenging operating environment. The primary risks to our Underperform rating are accelerating loan growth, better-than-expected earnings accretion from HCBK and more aggressive capital deployment. PNC Financial Services (PNC) Shares trade at ~11x 2017E EPS and ~1.3x TBV; both multiples are only slightly above the large-cap peer median multiples despite better relative core returns. Our $88 price target assumes shares trade near ~12x our 2017E EPS, below PNC's historical forward multiple (~13x). Decelerating loan growth along with NIM compression are key risks. PrivateBancorp, Inc. (PVTB) PVTB shares are trading at ~16.8x 2017E EPS, above the mid-cap peer median(~13.5x) given its pending acquisition by CIBC. Our $47 price target assumes shares trade near the proposed acquisition value. The primary risk for shares is the proposed acquisition by CIBC is delayed or not completed. Regions Financial Corp. (RF) Shares are trading at ~9.5x 2017E EPS vs. the ~10x large-cap peer median. Excess capital and book value accretion should limit downside, and the risk/reward looks more compelling after the recent pullback. Our $10 price target assumes shares trade near ~11.5x 2017E EPS, near historical levels (~12x). Earnings growth could disappoint given sluggish loan growth and the headwind from moderating reserve release. SunTrust Banks, Inc. (STI) Shares currently trade at ~11.5x 2017E EPS, above the ~10x large-cap peer median. Our $43 price target assumes shares trade at ~12x 2017E EPS, in line with the company s historical multiple (~12.5x). Decelerating loan growth along with NIM compression are key risks to earnings estimates. Synovus Financial Corp (SNV) SNV shares currently trade at ~1.25x tangible book value. Our $31 price target assumes shares trade near 1.35x 2016E TBV, which is a discount to the company s historical multiple (~2x) given the challenging current operating environment. 10

11 Loan and deposit growth trends may lag peers as the company loses market share. U.S. Bancorp (USB) Shares are currently trading at ~12x our 2017E EPS, a premium to large-cap peers (~10x) given better relative returns, capital flexibility, and pre-provision earnings growth outlook. Our $42 price target assumes shares trade at ~12.5x our 2017 EPS estimate, near the historical multiple. Slower-than-expected revenue growth and negative operating leverage are key risks. Wells Fargo & Company (WFC) WFC shares are currently trading at ~11.5x 2017E EPS, a premium to large-cap peers (~10x). Our $50 price target assumes shares trade near ~12x 2017 EPS, near the historical multiple (~12x). Decelerating loan growth and NIM compression could drive declines in pre-provision earnings. Zions Bancorporation (ZION) ZION is currently trading at ~13x 2017E EPS, slightly below the mid-cap peer median (13.5x). Our $29 price target assumes shares trade near 1x 2016E TBV, a discount to the historical median (~2.5x) given the challenging operating environment. Weaker relative loan growth and an accelerated pace of provisioning given larger energy exposure could drive negative EPS revisions. 11

12 Appendix - Important Disclosures and Analyst Certification Approved on 10 July :05EDT/ Published on 11 July :00EDT. Covered Companies Mentioned All stock prices below are the July 10, 2016 closing price. Associated Banc-Corp (ASB - $ Neutral) Bank of America (BAC - $ Outperform) BB&T Corp. (BBT - $ Neutral) Capital One Financial Corporation (COF - $ Outperform) Citizens Financial Group Inc. (CFG - $ Neutral) Comerica, Inc. (CMA - $ Outperform) Fifth Third Bancorp (FITB - $ Neutral) Huntington Bancshares Inc. (HBAN - $ Neutral) JP Morgan Chase & Co. (JPM - $ Outperform) KeyCorp (KEY - $ Neutral) M&T Bank Corp. (MTB - $ Underperform) PNC Financial Services (PNC - $ Outperform) PrivateBancorp, Inc. (PVTB - $ Neutral) Regions Financial Corp. (RF - $ Neutral) SunTrust Banks, Inc. (STI - $ Neutral) Synovus Financial Corp (SNV - $ Neutral) U.S. Bancorp (USB - $ Neutral) Wells Fargo & Company (WFC - $ Neutral) Zions Bancorporation (ZION - $ Neutral) (See recent research reports for more information) 16 Baird has received revenue within the prior 12 months or may receive revenue within the next 3 months from RF, its affiliates, or subsidiaries through a referral arrangement. 1 Incorporated makes a market in the securities of ASB, BAC, BBT, COF, CFG, CMA, FITB, HBAN, JPM, KEY, MTB, PNC, PVTB, RF, STI, SNV, USB, WFC and ZION. 3 Incorporated and/or its affiliates have received investment banking compensation from Bank of America, BB&T Corp., Capital One Financial Corporation, Huntington Bancshares Inc., PNC Financial Services, PrivateBancorp, Inc. and Wells Fargo & Company in the past 12 months. 10 Incorporated and/or its affiliates have been compensated by Zions Bancorporation for non-investment banking-securities related services in the past 12 months. Appendix Important Disclosures and Analyst Certification Incorporated and/or its affiliates expect to receive or intend to seek investment-banking related compensation from the company or companies mentioned in this report within the next three months. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions in foreign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges., Ratings and. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, 12

13 and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of June 30, 2016, Baird U.S. Equity Research covered 711 companies, with 51% rated Outperform/Buy, 48% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 13% of Outperform/Buy-rated and 5% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) the correlation between the analyst's recommendations and stock price performance; 2) ratings and direct feedback from our investing clients, our institutional and retail sales force (as applicable) and from independent rating services; 3) the analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort and 4) compliance with all of Robert W. Baird s internal policies and procedures. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at You can also call or write: Robert W. Baird & Co., Equity Research, 777 E. Wisconsin Avenue, Milwaukee, WI Analyst Certification The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2016 Incorporated Other Disclosures The information and rating included in this report represent the Analyst s long-term (12 month) view as described above. The research analyst(s) named in this report may at times, discuss, at the request of our clients, including salespersons and traders, or may have discussed in this report, certain trading strategies based on catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report. These trading strategies may differ from the analysts published price target or rating for such securities. Any such trading strategies are distinct from and do not affect the analysts fundamental long-term (12 month) rating for such securities, as described above. In addition, Incorporated and/or its affiliates (Baird) may provide to certain clients additional or research supplemental products or services, such as outlooks, commentaries and other detailed analyses, which focus on covered stocks, companies, industries or sectors. Not all clients who receive our standard company-specific research reports are eligible to receive these additional or supplemental products or services. Baird determines in its sole discretion the clients who will receive additional or supplemental products or services, in light of various factors including the size and scope of the client relationships. These additional or supplemental products or services may feature different analytical or research techniques and information than are contained in Baird s standard research reports. Any ratings and recommendations contained in such additional or research supplemental products are consistent with the Analyst s long-term ratings and recommendations contained in more broadly disseminated standard research reports. United Kingdom ( UK ) disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited ( RWBL ) holds a MiFID passport. The contents of this report may contain an "investment recommendation", as defined by the Market Abuse Regulation EU No 596/2014 ("MAR"). Please therefore be aware of the important disclosures outlined below. Unless otherwise stated, this report was completed and first disseminated at the date and time provided on the timestamp of the report. if you would like further information on dissemination times, please contact us. Please note, this report may provide views which differ from previous recommendations made by the same individual in respect of the same financial instrument or issuer in the last 12 months which is available at This material is distributed in the UK and the European Economic Area ( EEA ) by RWBL, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB and is authorized and regulated by the Financial Conduct Authority ( FCA ). For the purposes of the FCA requirements, this investment research report is classified as investment research and is objective. The views contained in this report (i) do not necessarily correspond to, and may differ from, the views of Robert W. Baird Limited or any other entity within the Baird Group, in particular Incorporated, and (ii) may differ from the views of another individual of Robert W. Baird Limited. 13

14 All substantially material sources of the information contained in this report are disclosed. All sources of information in this report are reliable, but where there is any doubt as to reliability of a particular source, this is clearly indicated. Robert W. Baird Group and or one of its affiliates may at any time have a long or short position in the company/companies mentioned in this report. Where the Group holds a long or short position exceeding 0.5% of the total issued share capital of the issuer, this will be disclosed separately by your RWBL representative upon request. This material is only directed at and is only made available to persons in the EEA who would satisfy the criteria of being "Professional" investors under MiFID and to persons in the UK falling within articles 19, 38, 47, and 49 of the Financial Services and Markets Act of 2000 (Financial Promotion) Order 2005 (all such persons being referred to as relevant persons ). Accordingly, this document is intended only for persons regarded as investment professionals (or equivalent) and is not to be distributed to or passed onto any other person (such as persons who would be classified as Retail clients under MiFID). Incorporated and RWBL have in place organizational and administrative arrangements for the disclosure and avoidance of conflicts of interest with respect to research recommendations. Robert W. Baird Group and or one of its affiliates may be party to an agreement with the issuer that is the subject of this report relating to the provision of services of investment firms. An outline of the general approach taken by Robert W. Baird Limited in relation to conflicts of interest is available from your RWBL representative upon request. Baird s policies and procedures are designed to identify and effectively manage conflicts of interest related to the preparation and content of research reports and to promote objective and reliable research that reflects the truly held opinions of research analysts. Analysts certify on a quarterly basis that such research reports accurately reflect their personal views. This material is not intended for persons in jurisdictions where the distribution or publication of this research report is not permitted under the applicable laws or regulations of such jurisdiction. Investment involves risk. The price of securities may fluctuate and past performance is not indicative of future results. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. You are advised to exercise caution in relation to the research report. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. RWBL is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the FCA under UK laws, which may differ from Australian laws. As such, this document has not been prepared in accordance with Australian laws. Dividend Yield. As used in this report, the term dividend yield refers, on a percentage basis, to the historical distributions made by the issuer relative to its current market price. Such distributions are not guaranteed, may be modified at the issuer s discretion, may exceed operating cash flow, subsidized by borrowed funds or include a return of investment principal. Ask the analyst a question Click here to unsubscribe 14