After the big rally in the banks since roughly this time last year, the clamor for breaking them up has died down. Return on equity, however, remains historically low, and the chiefs of the Too Big To Fail lenders may again find themselves facing calls to break up or sell off assets, write Lionel Laurent and Gillian Tan at Bloomberg.
Citigroup (NYSE:C) makes for an obvious case - its price to tangible book value ratio is less than 1x, a sizable discount to peers (WFC and JPM are approaching 2x, and BAC, MS, GS are all around 1.3x). At least part of that is due to Citi's lower returns and sizable overseas exposure, they write.
Should an activist get involved, it could come alongside the appointment of, say, Thomas Hoenig - a supporter of bringing back Glass-Steagall - as vice chair of the Fed (though word is Hoenig has moved to #2 on the depth chart for that spot).
Bank earnings have been running hot, but having bid the sector sharply higher for nearly all of 2016, and particularly since the election, investors are selling the news.
The latest two examples are Morgan Stanley (MS -2.2%) and Comerica (CMA -4.2%), both of which blew past estimates this morning. Comerica, for instance, is up a tidy 85% Y/Y, including a 38% run over the last three months.
There was a bit of caution among bank investors in the past couple of days, but they're back to buying low and selling high this morning as the initial results from Q4 begin to pour in. Among those reporting today: Bank of America (BAC +1.8%), JPMorgan (JPM +1.9%), Wells Fargo (WFC +2.8%), PNC Financial (PNC +2.4%), First Horizon (FHN -0.3%).
An early take from KBW's Bose George: Mortgage banking trends are weakening in line with expectations - with stronger volumes being offset by lower gain-on-sale margins. Higher rates are still filtering through though, and industry sources and recent data suggest volumes falling 10-15% this quarter.
Piper's Kevin Barker calls Wells Fargo's operating numbers "decent," but notes rising auto loan net charge-offs - 1.05% in Q4 vs. 0.87% in Q3, and 0.59% a year earlier.
Bloomberg's Alison Williams takes note of the positive signal of boosted buybacks at Bank of America, and calls cost cuts "key." It's hard to get too excited about any particular metric given the bank's near-50% run higher in the past few months.
Other players: Goldman (GS +1.1%), Morgan Stanley (MS +2%), Citigroup (C +1.6%), U.S. Bancorp (USB +1.3%), Regions Financial (RF +3.2%), New York Community (NYCB +1.3%), Huntington Bancshares (HBAN +2.2%), KeyCorp (KEY +2.3%)
The Q4 earnings beat was driven mostly by a lower tax rate and lower expenses, says Goldman Sachs in a quick first-take on Bank of America's (NYSE:BAC) results. Core earnings of $0.37 compared to the Goldman's team estimate of $0.38.
Goldman's bullish view on BofA remains largely intact thanks to leverage to higher rates and continued cost control. The stock is on the Conviction List with a $27 price target suggesting nearly another 20% of upside.
Downside risks include a slower rise in interest rates and slower economic growth.
Shares now lower by 0.85% premarket as satiated bulls use the earnings news as a reason to cash in some chips.
Consumer Banking net income of $1.921B vs. $1.736B a year ago. NII of $5.466B vs. $5.229B. Noninterest income slips though - to $2.645B from $2.782B. Noninterest expense of $4.328B down from $4.636B. Efficiency ratio of 53% vs. 58%. Mobile banking active users of 21.6M vs. 18.7M. Mortgage production of $21.9B up 29%.
Global Wealth and Investment Management net income of $634M vs. $623M a year ago.
Global Banking net income of $1.578B vs. $1.416B a year ago.
Global Markets net income of $658M vs. $171M a year ago. Trading revenue of $2.8B up from $2.4B, but shy of expectations for about $3B; FICC revenue of $1.9B shy of hopes for $2.1B.
Credit loss provisions of $774M vs. $810M a year ago. Net charge-off ratio of 0.39% down from 0.52%.
Company intends to buy back another $1.8B of stock by June 30 - it's not perfectly clear, but it looks like this is in addition to last year's $5B authorization.
Tangible book value per share of $16.95 vs. $15.92 a year ago. CET1 ratio of 11% flat from last quarter, up 80 bps for the year.
Q4 earnings season kicks off tomorrow morning with Bank of America (BAC -1.1%), Wells Fargo (WFC -0.8%), JPMorgan (JPM -0.8%), PNC Financial(PNC -3%), First Horizon (FHN -2.1%), and First Republic (FRC -1.4%) all reporting. BlackRock (BLK -1.4%) is also due up tomorrow.
Among those next coming next week: Citigroup (C -1.2%), Goldman Sachs (GS -1%), and Morgan Stanley (MS -1.2%).
The KBE is up a whopping 40% Y/Y, including a 23.5% run since the election. It's lower by 1.9% on today's session vs. the S&P 500's 0.5% decline.
Giving well-fed financial sector bulls another reason to take some profits is the continued decline in interest rates over the past few weeks, with the 10-year yield lower by another six basis points today to 2.32% - it topped at about 2.60% in mid-December.
KeyCorp (KEY -2%), Regions Financial (RF -1.5%), Fifth Third (FITB -1.5%), State Street (STT -1.7%), MetLife (MET -1.9%), Prudential (PRU -2.9%), E*Trade (ETFC -1.5%), Schwab (SCHW -1.2%).
Yes, higher interest rates should boost Goldman's (NYSE:GS) trading business, says analyst Keith Horowitz, but the path is "relatively uncertain and the bar is relatively higher" given the bank's near-40% move since the election.
He downgrades to Sell from Neutral. The $225 price target suggests 6% downside.
Also downgraded to Sell is Comerica (NYSE:CMA) after its 80% Y/Y advance. Horowitz retains Buy ratings on Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC)
The S&P 500 is lower by just 0.3%, but the financial sector (XLF -1.9%) is taking a sizable breather from its big post-election run.
Those buying on hopes for the long-awaited sustained rise in interest rates might be pausing as the 10-year yield sinks seven basis points to 2.37%. Two weeks ago, it was at 2.60%.
Bond bears have at least a couple of excuses to lighten up today. One might be softer-than-hoped jobs numbers from ADP. Or maybe economy bulls are mulling the carnage in retail (XRT -3.2%) - unless you happen to be Amazon (+2.3%) - following guidance, job, and store cuts at Macy's, and another 150 closings at Sears, as well as weak numbers from players like Kohl's.
Bank of America (BAC -2.6%), Citigroup (C -2.3%), Wells Fargo (WFC -2.8%), JPMorgan (JPM -1.9%), Morgan Stanley (MS -3.1%), Regions Financial (RF -2.6%), U.S. Bancorp (USB -1.9%), KeyCorp (KEY -1.7%), Fifth Third (FITB -2.9%), Schwab (SCHW -1.5%), MetLife (MET -2.4%), AIG (AIG -1.4%)
The post-election rally is notable for its "indiscriminate" buying of financial sector names, particularly large-caps, says Nomura's Steven Chubak. That's fine, he says, as it leaves "a very compelling" buying opportunity in a number of small- and mid-cap names which are set to be big winners under a Trump administration.
He upgrades Raymond James Financial (RJF +1.6%) and TD Ameritrade (AMTD +1.4%) to Buy, and even suggests a pair trade of long Stifel (NYSE:SF) and Raymond James vs. a short in LPL Financial (LPLA -0.4%).
Cut are made to Lazard (LAZ -1.1%) and Greenhill (GHL -3.6%) as the Trump rally overlooks the headwinds of protectionism and financing costs.
Turning to big-caps, Chubak is growing more cautious on M&A as he sees deal risks rising under Trump. He suggests a buy of Bank of America (BAC -0.8%) vs. a sale of Goldman Sachs (GS -0.2%).
Top 10 Holdings as of 11/30/2016: Apple Inc (AAPL): 4.63963%, Microsoft Corp (MSFT): 3.66302%, General Electric Co (GE): 2.20638%, Bank of America Corporation (BAC): 1.63435%, Wells Fargo & Co (WFC): 1.53812%, Exxon Mobil Corp (XOM): 1.42369%, Procter & Gamble Co (PG): 1.36211%, Intel Corp (INTC): 1.2842%, Citigroup Inc (C): 1.25185%, Pfizer Inc (PFE): 1.24018%
Top 10 Holdings as of 11/30/2016: NVIDIA Corp (NVDA): 0.29628%, Freeport-McMoRan Inc (FCX): 0.28589%, KeyCorp (KEY): 0.27006%, Comerica Inc (CMA): 0.26528%, Regions Financial Corp (RF): 0.26347%, Lincoln National Corp (LNC): 0.26105%, Harman International Industries Inc (HAR): 0.2585%, Citizens Financial Group Inc (CFG): 0.25834%, Bank of America Corporation (BAC): 0.25666%, Quanta Services Inc (PWR): 0.25473%