Big Banks November Outlook

  • Bank indices trading higher following strong earnings. Solactive U.S. Big Banks, Dow Jones U.S. Financials, & Russell 1000 Financial Services indices up +5.3%, +2.2%, & +1.9% from the first “Big Banks” earnings announcement (JPM) on October 15th through October 24th.

  • FED cuts & rising yields have led recent headlines; The FED cut rates twice in Q3 & an eagerness for more cuts could trouble the sector, Yields, particularly the U.S. 10-year, have risen since inverting in late August.

  • Big Banks have been outperforming broad based financials by ~8% since Yield Curve inverted

  • Macro to watch; interest rate environment, U.S. stocks trading at all-time highs, fragile global economy, U.S. & China trade talks, global protests & unrest.

  • Micro to watch; Will the FED cut rates for the 3rd time in 2019? Will the steepening yield curve continue to help big bank stock performance? Wells Fargo’s new CEO Charles Scharf started 10/21/19.

Macro Backdrop:

Leading up to the October FOMC meeting, little has been done to quell cut expectations or confirm the easing timeline. Investors and economists are anticipating a 3rd rate cut before the end of 2019, as the implied probability of an October cut sits at 90.4%.


Micro Backdrop:

The 2-year & 10-year U.S. treasury yields have been trending higher after briefly inverting in late August. Since August 27th, the lowest point of inversion, the Solactive U.S. Big Bank Index & Dow Jones U.S. Financial Index have rallied up +15.1% & +6.9% through October 24th.

Solactive U.S. Big Banks Index vs. sector benchmark indices since lowest 2-year & 10-year inversion point on August 27th.


Big Banks Spotlight & Earnings Recap

  • JPMorgan Chase (JPM) led big bank earnings posting profit and record revenue that surpassed Wall Street’s expectations. The company has grown YoY profit for the past seven quarters. The bank navigated the recent transition from a rising to lowering rate environment through an influx of cheap deposits and loan growth. JPM also posted $14.4 billion in net interest income (NII), relying heavily on consumer banking operations. The company is currently trading at all-time highs, outperforming its peers who have lagged the market.

  • Despite posting earnings and revenue beats, Bank of America (BAC) was ultimately held back by a $2.1 billion impairment charge for disbanding their partnership payment-processor First Data Corp. Overall, the bank grew its consumer, wealth and commercial businesses. Like JPM, loan growth and deposits (up 5% & 4% respectively), helped counter the low interest rate environment. Warren Buffet doubled down on BAC in early October. The banking sector bull requested the SEC’s permission to expand ownership stake beyond 10%. Bank of America also made headlines after joining the “race to zero” brokerage wars. BAC is offering unlimited free trades for preferred members and a flat rate $2.95 fee for online stock/ ETF trades for Merrill Edge Self-Directed clients not enrolled in Preferred Rewards.

  • Another earning season winner was Citigroup (C) which met CEO Michael Corbat’s promise of 12% ROE in 2019. The bank exceeded this goal by 0.2% in Q3, marking enormous growth from 4.1% when Corbat took over Citi in 2012.

  • Wells Fargo (WFC) was one of the few big banks that posted disappointing earnings. The company missed estimates by ~10% and was hit with a $1.6 billion long-avoided fraud charge. Wells was caught opening over 2 million deposit and credit card accounts without customers consent or knowledge back in 2016. The company was also disrupted by falling rates. A low rate environment is not suitable for Wells as it relies heavily on regional consumer lending in the U.S. Over half of the bank’s loan portfolio is comprised of variable rates linked to industry benchmarks. The FED has expressed interest to cut again at months end, meaning Wells is facing a tall task to turn around the recent scandal that has plagued company.

  • Goldman-Sachs (GS) earnings resembled the 2019 IPO market flop – posting a ~30% profit drop YoY and an earnings miss. Setbacks in investments like Uber (UBER) & Tradeweb Markets (TW) cost the company $267 million, and the WeWork fiasco another $80 million paper loss. Revenue from mergers and underwriting securities fell 18% as corporate deals slowed, and high-flying IPOs like Peloton (PTON) & SmileDirect (SDC) faltered. The company’s low sensitivity to U.S. rates is unique and one of the few positives from a gloomy Q3. In an effort to diversify outside of its traditional business segments, the company partnered with Apple (AAPL) and launched Apple Card.

  • Charles Schwab (SCHW) sold off following its announcement to remove trading fees. Schwab CFO stated that the cut will only set revenue back 3-4% or $90-100 million. Shares have rebounded considerably – following strong earnings and the realization that the core “traditional banking services” business is still intact.


Disclaimer

Source: Bloomberg L.P. Solactive MicroSectors™ U.S. Big Banks Index was launched on 2/25/2019. The Solactive MicroSectors™ U.S. Big Banks Index data prior to that date is hypothetical and reflects the application of the index methodology in hindsight. The hypothetical data cannot completely account for the impact of financial risk in actual trading. Past historical or hypothetical data is not a guarantee of future index performance.


For Institutional use only, this is not intended for retail investors, public viewing or distribution.


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