HomeResearch and NewsBanking Sector Report - April 2018
Mikhail Zavaraev CFA, Senior Analyst

Banking Sector Report - April 2018

EXECUTIVE SUMMARY

US banks started the second quarter with relatively flat dynamics after two consecutive months of decline. In April US banks increased by 0.5% MoM vs +0.3% of SPX index. Currently, US banks are just 0.3% higher than it was at the end of 2017, despite the most impressive January performance since 2010, +8% MoM. Dynamics within the sector was driven by quarterly results. So, the most spectacular performance was demonstrated by the banks with the highest positive EPS surprises. Especially worth noting is SIVB, which was opened up 16% on the day of report due to significant beat on revenues and EPS. The weakest performance was demonstrated by NYCB and SBNY, banks which continue to suffer from poor asset sensitivity.

US banks again reported strong figures, from EPS surprises point of view. 21 out of 24 banks demonstrated positive surprises, the highest share for the first quarters over last 5 years. Median EPS surprise for our group of banks was +5.3%, the highest figure in the last 6 quarters. Banks managed to exceed consensus estimates of EPS even despite significant growth of 1Q projections since the beginning of the year. Median growth of 1Q18 EPS of BKX index members was +9.8% in the 1st quarter, just the second positive revision for 1Q EPS estimates in the last twelve years (median revision for this period is -1.4% in the 1st quarter /average is -4.8% in the 1st quarter). But market perception of the earnings season was slightly negative, BKX index decreased by 1.5% since the start of the earnings season till the end of April (underperforming SPX, -0.6% for the same period of time). Possibly, the negative perception of the results was caused by negative revenue surprises. The share of negative revenue surprises among our group of banks was the highest one over the last 10 quarters. Median growth of consensus EPS estimates of both 2018 and 2019 years increased by 0.7% since the start of the earnings season till the current moment, confirming the idea that it was strong quarter for US banks. However, revenue estimates remained roughly unchanged during the same period of time.

Total net interest income of BKX index members increased by 0.8% qoq or +7.2% yoy in 1Q18 vs +0.5% qoq or +6.1% yoy in 4Q17 and +2.9% qoq or +10.8% yoy in 3Q17. NII increased qoq even despite lower day count in the 1st quarter of the year and still relatively weak loan growth. Just 5 out of 24 BKX members showed negative dynamics vs 7 members in 4Q17 and 4 members in 3Q17. NIM remains the key driver of net income growth as deposit beta is still significantly lower than it was in the previous cycles, but the latter has begun to grow recently. However, cumulative deposit beta remains only slightly above 20%. Median growth of NIM of BKX members was +6.5 bps qoq in absolute terms or +22 bps yoy vs flat qoq and +16.5 bps yoy in 4Q17 and +7.5 bps qoq or +21 bps yoy in 3Q17. Just 4 out of 24 BKX members demonstrated negative NIM qoq dynamics in 1Q18 vs 11 members with negative dynamics in 4Q17 and 6 both in 3Q17 and 2Q17.

Total non-interest revenue of BKX index members increased by 14.7% qoq and by 6.4% yoy in 1Q18 due to strong qoq trading incomes, especially equity trading revenue because of higher volatility. But overall non-interest revenue wasn’t strong with relatively weak mortgage and service charges fees. Fees of 14 out of 24 members of BKX index members decreased qoq. Even capital market revenues weren’t strong yoy in all segments despite growth of volatility in 1Q18. Thus, FICC trading declined by 13% yoy for BAC, went down by 7% yoy for Citigroup and was relatively flat yoy for JPM. Investment banking fees of DCM segment also declined yoy for majority of banks.

Loan growth remains weak. Median growth of average loans of BKX members was +0.22% qoq and just +1.4% yoy in 1Q18 vs +0.8% qoq and +1.5% yoy in 4Q17 and +0.3% qoq and +1.8% yoy in 3Q17. The same picture was observed for EOP loans. But there were more and more encouraging signs for the loan growth rate recently.

Credit quality again was better than expectations even despite some recent headwinds in consumer segment. Thus, median NCO ratio of BKX index members decreased by 2 bps qoq or -7 bps yoy to 0.25%. So, median provisions to loans ratio declined by 9 bps qoq to just 0.13%, the lowest post great-recession level. Overall, banks were positive about further dynamics of credit quality (at least, till the end of the year) even despite seasonal growth of card NCOs.

Overall, the operating trends of US banks remain strong with high growth of revenues and profits, good cost control, high quality of loan portfolio and ample capital levels. NIM remains one of the key drivers for US banks revenues with anemic growth of deposit beta. The risk of fast growth of deposit beta has not been started to realize yet. Decelerating loan growth is no more a headwind for the industry (it is still slow, but we expect accelerating of loan growth in the rest of the year), while tax reform will still have a significant positive impact on the industry. Direct impact of the reform is in price, from our point of view, while the second order effects and more hawkish pace of rates dynamics aren’t. We expect that the street will continue to revise estimates up further due to more hawkish rate outlook, acceleration of loan growth, stronger growth of the economy and the positive effect of expected deregulation. Our top peaks are Bank of America (BAC), JP Morgan Chase (JPM), Morgan Stanley (MS), Comerica (CMA) and Zions Bancorporation (ZION).

In April EU Banks increased by 3.0% MoM vs +3.9% of STOXX 600 Index. In late January EU banks finally went from the narrow sideway channel up, in which it was trading for more than 8 months, but after that the growth of index didn’t accelerate and they quickly went back to its 15-month lows. Absolute March performance of SX7P was +0.4 std from the mean and this result is in the top 35% of absolute monthly performance of SX7P since the index inception. It also underperformed the broad market index by 0.9% MoM and it is in the bottom 37% of relative monthly performance vs STOXX 600 index (-0.2 std).

Majority of European banks increased in April after decline in previous months. The key outperformers were Italian banks due to reducing political risk after Italian elections and ISP’s NPL sale with higher than historical average price. The key underperformer was Raiffeisen bank because of investor’s fears about negative impact of Russian sanctions on RBI’s operating results. Also, weak dynamics was demonstrated by some Scandinavian banks because of poor quarterly results.

The start of the year remains relatively weak for European economy and there is a clear risk that 1Q18 GDP growth will be lower than it was in the previous quarters (the first estimate will be released in early May). During the last meeting, ECB was noted that there was “some moderation” of growth of EU economy. However, it was also pointed that “solid and broad-based expansion of the euro area economy” remained. But, during Q&A session, Mario Draghi noted that loss of momentum was broad across both the countries and sectors, but, despite significant and sharp decline of some macro indicators recently, they are above averages. Also, he gave accent to stabilization of macro indicators “at these levels” and that the slowdown is temporary. But overall tone of Mario Draghi was cautious, from our point of view, despite the remark about normalization of economic growth rate. Given that, in our opinion, risk of extension of QE beyond September increased despite removing of QE bias at the previous meeting. Taking into account conservative approach of ECB and reluctance to do any abrupt moves, these concerns aren’t baseless, especially if the macro data continues to be weak in coming month and we don’t see acceleration of the inflation. So, the first meeting in Summer, which will be held on 14 June, is very important from the further monetary policy point of view. At least, we will see new staff forecasts that will take into account incoming macro information and will have better understanding how “a solid and broad-based expansion of the euro area economy” is.

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