Big Banks November Outlook

By Scott Acheychek

Saturday, October 26, 2019 5:30 PM EDT

The Big Banks Update:

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 ...

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.

Past performance is no guarantee of future returns. The opinions and views expressed are as of the date published and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. All third party links are not sponsored, endorsed, or provided by REX Shares, LLC. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use.

Investing involves risk, including the loss of principal. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment. The performance of any index herein is not illustrative of the performance of any security.

The Index has limited actual historical information. The Index Calculation Agent may adjust the Index in a way that may affect its level, and may, in its sole discretion, discontinue the public disclosure of the intraday Index value and the end-of-day closing value of the Index. The Index lacks diversification and is vulnerable to fluctuations in the technology and consumer discretionary industries. A limited number of Index constituents may affect the Index Closing Level, and the Index is not necessarily representative of its focus industry. An Index constituent may be replaced upon the occurrence of certain adverse events. The Index uses a proprietary selection methodology, which may not select the constituent issuers in the same manner as would other index providers or market participants.

MicroSectors™ is a registered trademark of REX Shares, LLC (“REX”).

Solactive AG (“Solactive”), as the Index Calculation Agent (as defined in the applicable pricing supplement), may adjust the Index in a way that may affect its level, and may, in its sole discretion, discontinue the public disclosure of the intraday Index value and the end-of-day closing value of the Index. The Index lacks diversification and is vulnerable to fluctuations in the applicable sector. A limited number of Index constituents may affect the Index Closing Level, and the Index is not necessarily representative of its focus industry. An Index constituent may be replaced upon the occurrence of certain adverse events.

Solactive AG (“Solactive”) is the licensor of the Solactive MicroSectors™ U.S. Big Banks Index and the Solactive MicroSectors™ U.S. Big Oil Index. Solactive makes no express or implied representation, guarantee or assurance with regard to: (a) the quality, accuracy and/or completeness of the Index; and/or (b) the results obtained or to be obtained by any person or entity from the use of the Index. Solactive does not guarantee the accuracy and/or the completeness of the Index and shall not have any liability for any errors or omissions with respect thereto. Notwithstanding Solactive’s obligations to its licensees, Solactive reserves the right to change the methods of calculation or publication of the Index, and Solactive shall not be liable for any miscalculation of or any incorrect, delayed or interrupted publication with respect to the Index. Solactive shall not be liable for any damages, including, without limitation, any loss of profits or business, or any special, incidental, punitive, indirect or consequential damages suffered or incurred as a result of the use (or inability to use) of the Index.

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Big Banks November Outlook

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