MicroSectors Newsletter | Big Banks

Banking Backdrop

Diversified big bank stocks have been on a roll since the start of earnings season. Following EPS beats, Bank of America, JPMorgan Chase, Morgan Stanley, and US Bancorp are up at least +10.0% each. The Solactive Big Banks Index (biggest 10 U.S. Banks by market cap, equally weighted) is up +18.2% since October 8th while broad financials (Dow Jones U.S. Financials Index), weighed down by insurance stocks and REITs, are +8.5% and regional banks (KBW Regional Banks Index) are +10.5%.

Source: Bloomberg


Recent bank headlines have been led by Charles Schwab’s $26 billion deal for competitor TD Ameritrade. The news sent other brokerage firms into a frenzy as E-Trade Financial Group (ETFC) and Interactive Brokers Corp (IBKR) fell following the announcement.


Macro Backdrop & the Steepening Yield Curve

Equity benchmarks have risen near all-time highs amid strong earnings and economic data while the chances of a China trade deal have strengthened in recent weeks. U.S. consumer sentiment has remained positive as inflation has fallen and unemployment, despite nearing 5-month highs, sits at historic lows. These factors have led the yield curve to steepen since inverting in late August. However, the FED’s recent statement on cooling its easing policy has led the yield curve to tighten again.

Source: Bloomberg


The FED

The Federal Reserve plans to cool its easing policy following three 25bp interest rate cuts in 2019. Most FOMC members believe the cuts meet moderate economic growth, robust labor market and current 2.0% inflation target objectives. As it stands, the FED will likely hold the 1.75-2.00% overnight lending rate range, unless incoming economic data changes. The current probability of a December meeting rate hike (4.1%) is higher than the probability of a rate cut (0.0%).

Source: Bloomberg


New Bank Business Segments Drive Growth

Charles Schwab (SCHW) has rebounded from its mid-October sell off. Investors initially met the company’s announcement to cut trading commissions with disdain. However, strong earnings and a deal to purchase TD Ameritrade have carried the stock higher. The discount brokerage pioneer posted revenue growth QoQ which only lagged JPMorgan’s +7.6% YoY growth.


Schwab’s ability to pivot has largely contributed to its recent successes. In 2015, the company attributed 60.4% of Net Revenue to Non-Interest Income (NII) compared to 39.4% through 9 months in 2019. As a result, the company has become less reliant on commissions and fees which dropped from 41.6% to 29.2% of Net Revenue over the same period. The company intentionally sacrificed trading commissions (3-4% of Net Revenue) to gain more users which could ultimately lead to more idle cash sitting in brokerage accounts. Schwab, acting more like a traditional bank rather than a brokerage, profits off idle cash by issuing loans while only paying account holders 0.23% to borrow money.


Schwab, looking to increase its market share, recently announced a deal to purchase TD Ameritrade for $26 billion. The move will expand Schwab’s assets to $5 trillion and ultimately further consolidate an industry facing massive disruption. Importantly, Schwab will add TD Ameritrade’s 11 million clients to its brokerage account arsenal.

Source: Company Filings


Goldman Sachs (GS) continues to push towards traditional banking as their near-term debt looms. The top-tier investment bank owes roughly $23 billion (on average) in annual debt maturities from 2020-2023. Goldman’s reliance on debt financing has made regulatory hurdles like total loss-absorbing capacity (TLAC) requirements easier, but this comes at the expense of their bottom line. The bank anticipates saving $100 million in interest expenses with every $10 billion of wholesale funding replaced by deposits annually.

Source: Bloomberg


Funding from deposits now represent 25.3% of total funding, which is up from 23.7% last year. Consumers have been a focal point for growth with initiatives like Marcus, Goldman’s consumer focused digital banking platform. The success of Marcus, which comprises $55 of $183 billion in deposits, has shown the promise of untraditional ventures and has opened the door for new projects like the Apple credit card.


Streamlining Banking Operations

Bank of America (BAC) considers itself a tech-focused company by nature with over 100,000 tech and operations workers. Through tech investments and partnerships, the North Carolina-based bank has improved its customer experience and minimized costs. BofA’s recent efforts to develop its own internal cloud are a prime example. The internal cloud will limit the use of third-party cloud providers and could ultimately reduce exposure to potential data breaches. Streaming operations by cutting servers from 200 thousand to 70 thousand, and data centers from 67 to 23 has saved BofA $2 billion annually.


BB&T’s (BBT) merger with SunTrust is seemingly headed in a positive direction. Earlier this month, SunTrust announced a 30-branch divestiture across North Carolina, Virginia, and Georgia. Branch divestments and consolidations will be key for both sides for regulatory and logistical purposes. When the deal was initially announced, at least 740 branches were within a two-mile radius of each other. Afraid of unfairly priced banking products, the Federal Reserve and the Federal Deposit Insurance Corporation are keen on seeing more divestments before approving the deal.

Source: Bloomberg


Bank Earnings Highlights, Recap, and Q4 Preview

JPMorgan Chase (JPM) gearing up for a slowdown? In a recent interview with 60 Minutes, JPMorgan CEO Jamie Dimon called the US consumer “quite strong.” However, JPM’s Q3 financials spelled a different story. Provisions for loan loss (PLL) increased ~32% QoQ (60% YoY) as loan growth fell.

Source: Bloomberg


Despite the interesting move in PLL, America’s biggest bank continues to outpace its peers across the board. Revenue has grown 8% YoY, beating Bank of America, CitiGroup, US Bancorp, and Wells Fargo, while trading revenue growth only trailed Wells Fargo.

Source: Bloomberg


Q4 Earnings Estimates for Big Bank Stocks

Source: Bloomberg


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Use of Hypothetical Back-Tested Data - The historical data of the Indices shown herein is from the dates displayed. Any index data shown prior to that date is hypothetical and a result of the application of the index methodology to historical data, and has inherent limitations. The creation of hypothetical data necessarily involves assumptions and cannot take into account the impact of financial risk in actual trading. Alternative modeling techniques or assumptions may produce different hypothetical back-tested information that might be more appropriate and that might differ significantly from the information presented herein. The hypothetical back-tested data herein should not be considered indicative of actual results that might be obtained from an investment in a financial instrument referencing the index.


Historical and hypothetical back-tested results are neither an indicator nor a guarantee of future index performance.


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