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Year-end 2018 earnings trends among banks
admin | January 18, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Despite a shortened 4-day work week, the deluge of domestic earnings included all the SIFI banks as well as a good sample size of regional banks. To date there have been no significant “blow-ups” or unexpected surprises from any of the domestic names, and SIFI bank issues continue to be the “safety play” for bondholders in 2019. Regional banks continue to trade rich to the SIFI banks, evidenced this week when PNC priced a 5-year senior holding company bond at the same level that Citibank priced a senior bank operating company bond (+100 bp). That relationship should clearly favor the Citi bank notes.
Primary trends to date for 4Q18 results:
- The secular decline for Wall Street is evident no place more than in the fixed income sales & trading operations of firms, as FICC revenues have been on a cyclical decline for the past decade. As of 2010 the Street generated over $30 billion in FICC revenues, but for FY18 it is expected that this figure will be $12 billion. The 4Q18 period was particularly difficult for Wall Street with FICC revenues down 15-30% among firms who have reported so far. On the wide end of that short-fall was Morgan Stanley, which saw FICC fall 30% year-over-year and is said to be due to higher-than-average balance sheet exposure.
- Loan growth remains stable for most banks with much of the growth coming from commercial real estate and commercial and industrial (C&I) lending. Residential mortgage balances were flat for most firms, which again highlights the difference for banks now vs what was happening before the crisis. With residential mortgage balances largely flat and the retention of a higher proportion of originations, the opportunity for gain on sale revenues is now considerably lower for banks.
- Asset quality measures remain stable across all major asset classes, which allowed banks to keep provision expenses in-line with asset growth. Only Wells Fargo realized release of reserves in 4Q18, which also speaks to concerning realization that loan growth has been negative for Wells while under balance sheet growth restrictions by the Fed.
Margins continue to improve for the domestic banks, even if only modestly. NIM for BAC was up 6 bp Q/Q to 2.48%, for JPM was up 3 bp Q/Q to 2.54% and only 1 bp better for Citigroup at 2.71%. Clearly the balance sheet structure for the SIFI banks hampers a direct comparison with the regional banks, but NIM for regionals remains considerably higher, and perhaps more prone to volatility as liabilities continue to re-price. Comerica posted NIM in 4Q18 of 3.70% as C&I loans continue to foster solid margin expansion, up 10 bp Q/Q.
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