HomeResearch and NewsArbat Capital: Banking Sector Report - April 2019

Arbat Capital: Banking Sector Report - April 2019


US banks significantly outperformed the broad market on MoM basis in April after
very weak performance in March when banks tumbled by 6.5% because of very
dovish Fed and lowered rate expectations. 
Thus, banks showed the strongest monthly
performance in April over the last 10 years. US banks skyrocketed by 9.3% MoM vs
+3.9% of SPX index. Absolute April performance on MoM basis was +1.3 StD from the
mean and it is in the top 8% of the absolute MoM performance of BKX index. Relative
April performance was +5.1% MoM, it is +1.1 StD from the mean and it is in the top 10%
of relative MoM performance vs SPX. Banks added +19.2% YTD on absolute basis but on relative basis it is just +1.4% YTD.

Dynamics within the sector was relatively uniform with positive performance of all
members of BKX index but BK. 
The key driver of individual shares dynamics was the
earnings season. So, banks with positive surprises on EPS and revenues added more
than 10% MoM in April. In turn, banks with weak quarterly earnings were almost flat MoM
while BK, the worst performing bank among BKX index members in April, even decreased
by 1.5% MoM.

US banks reported solid headline numbers again even despite significant decline of majority of yields in 1Q19. Underlying trends remain intact so market reaction on the
earnings season was positive. 19 out of 24 of our group of banks demonstrated positive
EPS surprises, slightly higher than median number of positive quarterly EPS surprises of
BKX index members over the last 49 quarters. Thus, median EPS surprise for our group
of banks was +3.5% vs median quarterly figure over the last 12 years of 4.3%. Moreover,
revenue surprise was also positive, the 13th quarter over the last 4 years, +0.35%. 13
companies of our group of banks or 63% demonstrated positive surprise on revenue, inline with the median quarterly figure since Q1 2007. But, market perception of the results
was clearly positive – BKX index increased by 4.7% since the start of the earnings season
till the end of April while S&P 500 index added 2.0% over the same time. Median percent
change in price around the earnings date of our group of banks of +0.7% was the third
consecutive quarter of the positive reaction on quarterly earnings. But consensus
estimates were revised down QTD. Thus, 2Q19 EPS estimate was revised down by 0.9%
QTD (median decline of EPS of BKX index members), 2019 FY EPS estimate was
lowered by 0.5% QTD while 2020 FY EPS estimated declined by 1% QTD.

Overall, operating trends of US banks remain strong with high credit quality, good
cost control and positive operating leverage but there are just few profit drivers,
from our point of view, as well as less and less positive catalysts, given significant
growth of banking shares in recent months. 
Notwithstanding, banks continue to trade
with significant discount to S&P 500 index, reflecting late cycle concerns of investors.
Thus, banks are trading with -2.4/-1.7 std on P/E CY and -1.6/-1.3 std on P/E NY (on the
basis of samples from 2000 and 2010 yrs to current moment) relative to historical
averages. As for relative to S&P 500, banks are currently trading at -2.3 and -2.1 std from
the sample mean (2010-current moment) for P/E CY and P/E NY, respectively. Despite
stocks are trading at a significant discount, we have more cautious view on US banks at
the moment given higher risks and still optimistic dynamics of consensus EPS estimates
of US financial institutions. NIM is currently turning from tailwind to headwind given dovish
Fed, rising deposit beta, noninterest-bearing deposits runoff and flat/inverted yield curve.

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