Eq: Financials (114)
(New York)
Goldman Sachs was the stock of the year in 2019. It was the best performing stock in the Dow, gaining more than 37% in the year. The bank started the year poorly with its 1MDB scandal, but as the year went on, David Solomon’s (the bank’s new CEO) leadership started to help the stock. The bank settled the issues and its earnings improved. It also made a large push into consumer finance as part of an effort to diversify its business and become a “modern, digital consumer bank”. The bank, through “Marcus”, its new consumer lending unit, is offering consumer savings products, while Goldman itself is partnering with Apple on the company’s new credit card.
FINSUM: In our view, Goldman’s stock price outlook is very linked to the big new push it is making in consumer finance. Its core business will likely continue to perform as it has, so the real difference maker will be its new business lines and the success of its “modernization”.
(New York)
Investors should take a look at big banks. Executives at top financial companies are excited about potential Q4 performance. Earnings estimates are moving higher based on more bullish guidance. Last year’s fourth quarter saw a dismal performance from big banks, so that sets up a very favorable comparison to this year. Morgan Stanley’s earnings may be up 41% according to analysts surveyed by Bloomberg.
FINSUM: It will probably be well-telegraphed, but big bank stocks still seem like they might see movement higher now and a pop on earnings releases.
(New York)
Banks across the country are under pressure, and it is starting to show. Four US banks have failed already this year (three in the last month) compared to zero last year. The reasons why are many, but low interest rates and strong competition have been impacting the space. The four bank failures do not seem to be due to a particular asset class, but particular idiosyncratic circumstances. Still, as mortgages have seen lower rates, banks are more and more likely to move into more risky areas to boost yields.
FINSUM: In 2006 there were zero bank failures, in 2007 there were three, in 2008 it was very ugly. We do not think we are going down the same rode, but it is a sign worth noting.
(New York)
Over the last few years, Goldman Sachs has undertaken one of the biggest bets in its history. It is trying to change its DNA as a pillar of high finance to become a broad financial services company that includes a large consumer-facing business. This led to the launch of its new business, Marcus, which is a consumer investment and lending unit. So far, the results have not been pretty. The bank has lost about $1.3 bn from investing in Marcus, and the default rates on its loans have been much higher than average, causing it to pull back from the space somewhat. It has also caused a lot of internal tension at the bank, with many senior partners leaving as the company completely overhauls itself. On the positive side, the bank has pulled in $50 bn in consumer deposits, which is a new source of funding it never thought it would have access to.
FINSUM: Goldman’s stock is still at 2014 levels. That says it all.
(New York)
One of the biggest stocks in the country is sitting relatively unloved and appears ready for an investment. That stock? Bank of America, only the biggest deposit holder in the US. The single most important thing to recognize about the bank is that is a well-run powerhouse commanded by the architect who rebuilt it after the Crisis—Brian Moynihan. The bank has a 2.46% dividend, which is looking sweeter every day. JP Morgan just went bullish on the stock, and if Moynihan sticks with the trend and boosts the dividend and adds buybacks, the future looks very bright.
FINSUM: There are some headwinds given the likelihood of falling rates, but that situation also tends to juice all stock prices, which provides some good downside cover.
(New York)
Bank stocks are probably not a good bet right now. They suffer when rates fall and they are quite exposed to economic slowdowns (in other words, ignore the new idea that banks are safe dividend producers like utilities). However, there are some banks and financial stocks that look likely to win in the near- to medium-term. Three names to consider: JP Morgan, Amex, and Discover. JP Morgan is basically just a very healthy bank with increasingly competitive pricing which looks likely to grow EPS nicely over the next few years. Amex is an interesting pick because it has a very high quality customer base, and its unique charge card revenue base is not so exposed to falling interest rates, making it much more defensible in a low rate/recession environment.
FINSUM: The Amex pick is quite unique. Their customer base is higher end, so less affected by recession. And their unique revenue model (for a card company) means they have lower interest rate exposure.
(New York)
With markets at elevated levels, investors may be looking for a safety stock. How about one outside the usual suspects? Here is a suggestion—Goldman Sachs. Yes, we know, that sounds odd considering that investment banks tend to have wildly unpredictable earnings because of fluctuations in trading revenue. However, the bank has just made a big dividend boost from 85 cents to $1.25 per share, which is likely to significantly elevate its status with dividend-seeking investors. Goldman is also diversifying away from its highest risk businesses and smoothing out its revenue by focusing on a more steady Main Street-oriented suite of products.
FINSUM: We think the jury is still out on Goldman’s success at retail banking products. That said, the prevailing narrative about its transformation and the dividend boost will help it be less volatile.
(New York)
If you want to pick up some great bank stocks at a great discount, now is the time to do it. Despite great earnings, JP Morgan still looks inexpensive. Goldman Sachs does too. Both banks saw big trouble in their trading divisions in the first quarter, which has led to some attractive valuations. The problem for investors is that markets that keep doing what they have will not be bullish for the banks (i.e. low volatility), so options strategies may be the best way to play the situation.
FINSUM: Nothing would be better for this trade than if there was another big market disturbance that drove a bunch of volatility, which is quite good for trading revenue.
(New York)
Something very worrying happened yesterday if you are an investor in bank stocks. Bank of America released what were widely considered to be stellar earnings, yet the stock fell. We don’t just mean stellar in the “oh, they beat estimates” sense, but that the company looks healthy even as some other banks (e.g. Goldman Sachs) look weak. However, the stock fell because the bank indicated that its cost pressures were rising, and coupled with the fact that yields are now lower, means the bank will have higher expenses and lower interest income, putting a squeeze on margins.
FINSUM: This does not seem to be unique to B of A, as the whole industry has the same interest margin and cost pressures.
(New York)
Goldman Sachs investors took it on the chin this week. Earnings numbers just released look pretty grim, especially as compared to some other banks, like JP Morgan, which had good showings. The bank got hit by a triple whammy of lower trading revenues, weaker private equity profits, and lower fees from investment banking, all of which conspired to bring earnings down by 20% in the first quarter. David Solomon, CEO, is promising the company is undertaking a “front to back” performance review of Goldman’s businesses.
FINSUM: This looks particularly poor because JP Morgan was able to achieve the highest ever quarterly profit of a US bank during the same period.
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(New York)
When you first read that headline, you probably thought it was pretty counterintuitive. Bank stocks saw a big selloff and it is looking ever more likely that we are headed towards a recession—certainly not bullish for bank shares. However, RBC Capital markets argues that bank stocks may actually do well. “The recent sell-off in bank stocks provides an opportunity for investors to buy bank stocks”, says RBC. The reason why is that in periods where the economy slows, but an outright recession is avoided, bank shares outperform. This happened from 1994 to 1998.
FINSUM: This could be a good value play if we avoid a recession, but that seems like a gamble with asymmetric risk to the downside.
(New York)
On the surface of it, this does not seem like a good time to buy bank stocks. Bank shares have done really well in the last month, but the Fed’s sudden and dramatic dovishness on rates would seem to be a catalyst for a move lower in bank shares. Countering that theory stands Mike Mayo from Wells Fargo, an equity analyst who thinks the picture of bank shares looks better. Many big bank stocks are trading at relatively cheap 10x p/e ratios, with yields of 3% or more. According to Mayo, “The negative sentiment has created an opportunity with uniquely attractive valuations”. Banks are also expected to do a large amount of buybacks in 2019, with some like Wells Fargo and Citi, expected to spend more than 100% of earnings on dividends and buybacks.
FINSUM: Banks do seem like a good value play. But at the same time, they have been trading for years more on a macro basis. Which side seems more realistic? Stick with the trend—bank stocks now have a weaker outlook because of the Fed.
(New York)
If you are keeping an eye on financial stocks, this morning held a very bad omen. Citigroup was the first big Wall Street bank to report earnings, and the numbers weren’t pretty. In particular, the ever important area of fixed income trading revenue was disappointing, with total revenue dropping 21% to the lowest in seven years. The company missed its full-year profitability target by a wide margin.
FINSUM: The reason this is so worrying is that the fourth quarter was a very volatile period for markets. Such environments usually send trading revenue surging for banks.
Morgan Stanley Warns “Winter is Coming” for Stocks
Written by FINSUM
(New York)
If financial shares are any indicator of the coming stock market environment, asset prices look set for a long rough patch. According to Morgan Stanley, financial shares are suffering as “The carefree days of rising rates and pristine credit quality could be coming to an end”. The bank’s research team continued, “We cannot ignore the growing risk of a bear credit market next year preceding a recession as well as the negative impact of weaker economic growth”.
FINSUM: Banks stocks are trading like the economy is headed towards a bear market, and we can’t help but think it may not be a bad call.