Mixed Bank Earnings; PeerIQ’s Modeling Archive

By Vy Phan

April 21, 2019

Greetings,

Earnings season got underway with bulge-bracket banks reporting this week. While most banks delivered near-record Net Interest Income, the guidance for NII growth fell below expectations. The yield curve is about the flattest it’s been post-crisis and the possibility of a rate cut clouded the outlook for NII growth.

The big themes are that banks are increasing reserves by 7% to 28%. Tech spend, particularly on digital channels, is up 10% YOY. Banks with strong consumer banking franchises saw ROE improvements (JPM, Wells) whereas banks with a higher mix of trading revenues saw declines in ROE (GS, MS).

Are cell phone operators the next entrant to consumer banking? Carriers already offer, directly or indirectly, cell phone financing and they exhibit very low loss rates as compared to other forms of consumer credit. T-Mobile is offering a digital checking account to increase loyalty and switching costs. The carriers have some of the key characteristics for competitive advantage (e.g., captive channel, low CAC, unique data, etc.) and we’ll keep our eyes on this industry development.

In regulatory news, Avant is said to be in “late-stage discussions” to receive a Fintech charter. The OCC introduced the FinTech charter in 2018 and Avant would be the its first recipient. The charter has been challenged by the NY State Department of Financial Services and the Conference of State Bank Supervisors, both of whom have questioned the OCC’s authority to grant such a charter. Avant’s approval will be a big win for the FinTech sector and could pave the way for others to receive it. You can read our detailed analysis on the FinTech charter here.

Mixed Bank Earnings

We look at bank earnings individually below. Stock price performance post earnings has been weak except for JPM and MS.

(Changes below are YoY unless otherwise mentioned)

Bank of America’s revenue dropped slightly to $23 Bn. Earnings increased by 6% to $7.3 Bn, the highest on record.

Earnings growth was driven by consumer banking which saw earnings grow by 25% to $3.2 Bn.
NII of $12.5 Bn was slightly lower than the record $12.7 Bn last quarter. The outlook for NII growth has worsened due to the flat yield curve.
Consumer loans grew by 5% to $292 Bn.
Provision for credit losses increased by 21% to $1.0 Bn, while total loss reserves decreased by 7% to $9.6 Bn. Loss reserves as a percentage of loans decreased by 0.1% points to 1.0%.
Net charge-offs increased by 9%, the highest growth amongst bulge-bracket banks, to $1.0 Bn. The net charge-off rate was flat at 0.4%.
BAC’s technology spend is expected to grow by 10% this year.
Digital banking customers grew by 4% to 37 Mn, the highest amongst bulge-bracket banks. BAC noted that the bank generated 27% of its total sales online. P2P payments on its Zelle platform nearly doubled to $16 Bn.
Bank of America’s ROE improved by 0.5% points to 11.4%.

Citibank’s revenues were lower by 2% at $18.6 Bn. The bank earned $4.7 Bn, up by 2%.

Citi’s revenues were lower QoQ in the consumer bank, despite rolling out new digital banking features like checking accounts and personal loans. The bank gained $1 Bn in new deposits from its digital channel.
Citi’s outstanding consumer loans grew by 3% to $307 Bn.
Provision for credit losses increased by 7% to $2.0 Bn, while total loss reserves were unchanged at $12.3 Bn. Loss reserves as a percentage of loans were unchanged at 1.8%.
Net charge-offs increased by 4% to $1.9 Bn. The net charge-off rate increased by 0.2% points to 2.5%, the highest amongst its peer group.
NII increased by 8% to $11.8 Bn.
Digital banking customers grew by 10% to 30 Mn. as the bank continues to roll-out its digital offerings nationally.
Citi’s ROE for this quarter was 10.2%, up by 0.5% points.

Goldman Sachs’s results disappointed with revenues of $8.8 Bn, down by 13% and net income of $2.3 Bn, down by 21%.

The drop in revenue was driven by equity trading revenues down by 24% and fixed income trading down by 11%.
NII increased by 33% to $1.2 Bn, driven by record NII in the Investing and Lending division.
Provision for credit losses more than quadrupled to $0.2 Bn. Provisions for credit losses were primarily driven by consumer loans. GS had $5 Bn in consumer loans at the end of Q12019.
GS launched a credit card with Apple called Apple Card. The partnership with Apple includes key elements that underpin many other strategic growth initiatives across the firm wrt reimagined products, no legacy technology, digital delivery and a broad acquisition channel.
Goldman’s ROE was 11.1% down by 4.3% points.

JP Morgan reported revenue growth of 4% to $29.1 Bn driven by record NII of $14.6 Bn. Earnings grew by 5% to $9.2 Bn.

Trading revenue fell by 17% to $5.5 Bn.
JPM saw an increase of 1% in its consumer loan book to $479 Bn.
Provisions for credit losses increased by 28% to $1.5 Bn. The increase was driven by a higher charge-offs in credit cards due to loan growth.
Total loss reserves increased by 1% to $13.5 Bn. Loss reserves as a percentage of loans were flat at 1.4%.
Net charge-offs increased by 8% to $1.4 Bn. The net charge-off rate was flat at 0.3%.
The bank saw 11% growth in its digital banking customers, the highest growth amongst its peers, to 34.4 Mn. JPM is rolling out its digital bank Finn nationally.
JPM’s ROE for this quarter was 16%, the highest post-crisis.

Revenues at Morgan Stanley dropped by 7% to $10.5 Bn, driven by a 15% drop in trading revenues. Net income decreased by 9% to $2.4 Bn.

The consumer lending book grew by 5% to $72 Bn. Morgan Stanley is looking for a mid-single digits growth rate going forward and will focus on mortgages and securities-based lending.
NII increased by 4% to $1 Bn.
Morgan Stanley’s ROE declined by 1.8% to 13.1%.

Wells Fargo beat expectations as revenues dropped by just 1% to $21.6 Bn. Net income rose by 14% to $5.9 Bn, the highest growth amongst bulge-bracket banks. The bank faces a regulatory asset cap until the end of 2019 which is hampering loan growth.

The consumer loan book was flat at $458 Bn.
Provision for credit losses more than tripled to $0.8 Bn, while total loss reserves decreased by 5% to $9.9 Bn. Loss reserves as a percentage of loans decreased by 0.1% points to 1.1%.
Net charge-offs decreased by 6% to $0.7 Bn. The net charge-off rate was unchanged at 0.3%.
NII increased by 1% to $12.3 Bn.
Digital banking customers grew by 3% to 29.8 Mn.
WFC’s ROE for this quarter increased by 2.1% points to 12.7%.

PeerIQ’s Modeling Archive

PeerIQ’s Modeling Archive enables users to build their own pre-pay and default models to drive investment decisions, derived from TransUnion data across all asset classes. Reach out to learn more!

Industry Update:

After Years of Debate, Avant May be the First to Receive an OCC Fintech Charter (CrowdFund Insider, 4/12/19) Avant is said to be in “late-stage discussions” concerning the approval of a Fintech charter.
JPMorgan Gets One More Boost Off Rate Hikes Before Fed Pause (Bloomberg, 4/12/19) Bank’s net interest income rises to a record $14.5 Bn.
Wells Fargo Profit Surprise Offers Respite After Tough Start (Bloomberg, 4/12/19) First-quarter net income rises to the highest in five years.
Citi Shares Slump After Revenue Growth Stalls in Consumer Unit (Bloomberg, 4/15/19) Accelerated expansion had been expected in retail division.
BofA Shares Drop as Bank Sees Interest Income Growth Fading (Bloomberg, 4/16/19) Net interest income likely to climb at half 2018’s rate: CFO.
Goldman Falls as Equity Trading, Banking Backlog Decline (Bloomberg, 4/15/19) Pipeline of deals shrinks from the end of the fourth quarter.
Morgan Stanley's Brokers, Traders Counter Dealmaking Decline (Bloomberg, 4/15/19) Drop in investment-banking fees is steepest on Wall Street.
Worried a recession is coming, U.S. online lenders reduce risk (Reuters, 4/15/19) Lenders are tightening credit requirements for high-risk borrowers and securing longer-dated funding.
SoFi Co-Founder Steps Back Onstage with Salary Finance (PR Newswire, 4/16/19) SoFi co-founder Dan Macklin is joining Salary Finance, a provider of salary-linked loans, as CEO.
Banks turn to a former rival to jump-start digital platforms (American Banker, 4/16/19) TD Bank will Avant’s Amount system to make unsecured personal loans.
Mastercard Redefines Choice at Checkout with Acquisition of Vyze (BusinessWire, 4/16/19) Mastercard has acquired Vyze, a POS financing solutions provider.
Earnest Launches Private Student Loans (PR NewsWire, 4/16/19) Earnest, a student loan refi provider, is launching its own student loan program.
CommonBond for Business™ Partners with Empower Retirement to Bring Enterprise Student Loan Solutions to Nine Million Employees Nationwide (CommonBond, 4/9/19) CommonBond Works With Second-Largest Retirement Services Provider in the U.S. to Reduce Student Debt Across the Country.
SoFi announces partnerships to expand insurance offering (Insurance Business Mage, 4/16/19) SoFi is diversifying its product offerings and will now offer auto and home insurance through Root and Lemonade.
T-Mobile to Offer a Checking Account in Attempt to One-Up R ivals (Bloomberg, 4/18/19) The idea is to keep customers loyal in a market where T-Mobile is battling two much-larger competitors.

Lighter Fare:

Israeli scientists ‘print 3D heart using human tissue’ (BBC, 4/15/19) In a major medical breakthrough, scientists printed a miniature heart using human tissue.