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Macquarie Research Universal Banks
7 January 2019 2
Ridin’ The Storm Out
It was a brutal end to 2019, as universal bank stocks were down approximately 19% in the fourth quarter,
underperforming the S&P by 500bps. Although concerns regarding potential peak earnings initially weighed on
the group, the downdraft gained steam due to trade war concerns, political uncertainty in Europe, the US
government shut down and the potential end to the Fed rate hike cycle. The market volatility led to a material
slowdown in the market for underwriting and a choppy trading environment led by declines in prime brokerage
as hedge funds de-levered.
Fig 1 Bank 2018 Stock Performance
Source: FactSet, Macquarie Capital (USA), January 2019
Super Regional BanksFY184Q18
BB&T CorporationBBT-12.9%-10.8%
U.S. BancorpUSB-14.7%-13.5%
M&T Bank CorporationMTB-16.3%-13.0%
Huntington Bancshares IncorporatedHBAN-18.1%-20.1%
PNC Financial Services Group IncPNC-19.0%-14.2%
Zions BancorporationZION-19.9%-18.8%
Comerica IncorporatedCMA-20.9%-23.8%
SunTrust Banks, Inc.STI-21.9%-24.5%
Fifth Third BancorpFITB-22.4%-15.7%
Regions Financial CorporationRF-22.6%-27.1%
Wells Fargo & CompanyWFC-24.0%-12.3%
KeyCorpKEY-26.7%-25.7%
Citizens Financial Group IncCFG-29.2%-22.9%
Median-20.9%-18.8%
Average-20.7%-18.6%
Universal Banks
JPMorgan ChaseJPM-8.7%-13.5%
Bank of AmericaBAC-16.5%-16.4%
Morgan StanleyMS-24.4%-14.9%
CitigroupC-30.0%-27.4%
Goldman SachsGS-34.4%-25.5%
Median-20.9%-18.7%
Average-21.2%-18.9%
S&P 500-6.2%-14.0%
Macquarie Research Universal Banks
7 January 2019 3
These factors have worked in concert to drive universal bank valuations to a multi-year low at 8.3x 2019
estimates, which is 56% of the S&P multiple versus near 70% historically. Moreover, Citi and GS are now
trading below current TBV while MS is trading only modestly above our forward TBV estimate. This risk-off
environment has led to outperformance for JPM and BAC, which has led to a widening valuation gap and a
change in our investment thesis.
Fig 2 Universal Bank Peer Valuation
Source: Company data, Macquarie Capital (USA), January 2019
Fig 3 Historical Valuation vs S&P 500
Source: FactSet, Macquarie Capital (USA), January 2019
Price/Price/Price/Price/Price/2018E2019E2020ECET1CET1Price
CompanyTickerPrice3Q18 TBV4Q19E TBV2018E EPS2019E EPS2020E EPSROTCEROTCEROTCE3Q184Q20RatingTarget
Bank of AmericaBAC25.58$ 1.48x1.36x10.2x9.1x8.1x15.0%15.9%16.7%11.5%11.0%N30$
CitigroupC55.13$ 0.89x0.80x8.6x7.3x6.4x10.5%11.5%12.1%11.8%10.9%OP76$
Goldman SachsGS175.05$ 0.93x0.87x7.5x7.1x6.7x13.1%12.8%12.8%11.4%11.3%OP220$
JPMorgan ChaseJPM100.69$ 1.81x1.65x10.8x10.0x9.2x17.2%17.4%17.6%12.0%11.1%N120$
Morgan StanleyMS41.30$ 1.16x1.09x8.7x8.3x7.6x13.6%13.6%13.9%16.7%16.2%OP50$
Median1.16x1.09x8.7x8.3x7.6x13.6%13.6%13.9%11.8%11.1%
Average1.26x1.15x9.2x8.4x7.6x13.9%14.2%14.6%12.7%12.1%
Forward P/ESPXUniversal Banks% S&PLarge Regionals% S&P
2000-200718.8x13.4x71%13.0x69%
2003-200716.6x12.0x73%13.1x79%
2012-Current16.6x11.0x66%12.6x76%
Current: 2018E15.9x8.7x55%10.1x63%
Current: 2019E14.8x8.3x56%9.3x63%
Current: 2020E13.9x7.6x55%8.9x64%
Macquarie Research Universal Banks
7 January 2019 4
Stock Views & Estimate Revisions
We are upgrading Citigroup to Outperform from Neutral and downgrading Bank of America to Neutral from
Outperform. Citi is now trading at 89% of TBV and a 20% discount to BAC’s 2019 P/E. Although BAC currently
offers better returns and lower credit risk, we believe this gap will close as Citi takes out further excess capital
coupled with the continued liquidation of non-core assets. We expect greater TBV growth from Citi partly due
to the expectation for outsized buybacks while the stock is trading below TBV. Although the current interest
rate environment is a headwind for both banks, it will likely be more problematic for BAC with more exposure to
a flattening curve and investor sentiment shifting away from historic asset sensitive enthusiasm. For Citi, the
flattening curve will be a headwind for trading NIM; however, the bank is more exposed to the short end of the
curve partly due to its card portfolio. Importantly, Citi is beginning to gain traction on card conversion of
promotional balances, which should help improve margins.
Fig 4 Valuation – NTM P/E Fig 5 Valuation – P/Forward TBV
Source: FactSet, Macquarie Capital (USA), January 2019 Source: FactSet, Macquarie Capital (USA), January 2019
Citigroup (C, Outperform) We are upgrading Citi to Outperform partly due to valuation coupled with outsized
buybacks and ability to improve yields in cards despite a more challenging rate environment. The stock
underperformed peers in 2018, down 27% versus the group down 19%, driving a 13% discount to peers.
Importantly, the stock is trading at 89% of tangible book value despite excess capital and expected returns of
capital in the low double digit range. Despite uncertainties in the macro environment, we believe Citi’s stock is
compelling with a 3.4% dividend yield and due to 1) improving performance in cards; 2) nearly 20% expected
TBV growth by 4Q20; 3) continued operating leverage; 4) credit risk concerns overdone in valuation; and 5)
strong risk/reward relationship.
Citi Catalysts
Card yields should help at the latter stages of Fed cycle. Should the Fed be close to the end of its rate
hike campaign, we believe Citi is better positioned than banking peers as a halt in rates may ease dollar
strength benefiting its global footprint, coupled with the fact that investor sentiment for this name is not tied
to asset sensitivity. More important, however, is the recent traction in cards and Citi’s ability to reprice and
convert promotional card balances to full rate revolving balances. In the last quarter, Citi’s conversion rate
was nearly 50%, driving a 7% YoY growth in full-rate revolving balances (4% growth for total balances) and
a 40bps sequential increase in yields for North American branded cards. This conversion may help improve
yields despite the current falling yield curve.
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
CBAC
0.0x
0.3x
0.5x
0.8x
1.0x
1.3x
1.5x
1.8x
2.0x
CBAC。。。以上简介无排版格式，详细内容请下载查看