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www.jpmorganmarkets.com

North America Equity Research

09 July 2019

Large Cap Banks 2Q Preview

Modest 2Q Hurt By NIM; Divergent Signals From

Markets

Banks — Large-Cap

Vivek Juneja

(1-212) 622-6465

vivek.juneja@jpmorgan.com

Bloomberg JPMA JUNEJA <GO>

Jonathan Summitt

(1-212) 622-6341

jonathan.summitt@jpmorgan.com

Andrew J Dietrich

(1-212) 622-4244

aj.dietrich@jpmorgan.com

J.P. Morgan Securities LLC

See page 37 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be

aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this rep

ort as only a single

factor in making their investment decision.

We expect weak 2Q results, hurt primarily by the flatter yield curve plus mixed comps

for capital markets-related revenues. Key issue in 2Q is the economic outlook and

what banks are seeing among their customers, especially the impact of tariffs and trade

wars. Signals from markets are diverging: treasury yields are down sharply, indicating

concerns about slowdown, but equity and markets are holding up. Credit spreads have

been choppy but ended 2Q without much change, and equity markets are up. In our

view, this may imply that the markets do not expect a material slowdown, and hence,

manageable, even if there are a couple of Fed rate cuts, and the drivers of rate cuts

seem to be driven more by political factors. We expect large banks’ earnings will be

hurt a little by Fed rate cuts, but a modest downturn should be very manageable as

large banks have strong capital positions and underwriting standards are tighter than

before prior downturns. That said, some banks may have less ability to moderate the

impact of Fed rate cuts. As a result of this dichotomy, banks’ guidance may vary as

some may not incorporate rate cuts into their base case but instead give sensitivities.

 We expect large bank stocks to be range bound near term due to political

uncertainty. Large bank stocks recovered recently after CCAR 2019 and good

employment data, which lowered expectations a tad for rate cuts. Banks raised

dividends in CCAR 2019, and dividend yields are attractive. Valuations remain

attractive – Money Centers are trading at 9.4x 2020 EPS on average, below 9.9x

long term avg, and Regionals are at 10.1x 2020 EPS, below 11.4x avg. Near term,

we recommend PNC and Citizens. Medium term, we continue to like banks with

non-macro drivers, such as Citi and PNC. Given uncertainty about rate cuts, could

add a more rate sensitive bank – Bank of America, but key is expense outlook.

 Key 2Q drivers: 1) lower net interest margins due to flatter yield curve; 2) modest

loan growth (Fed weekly data muddied in 2Q); 3) mixed capital markets revenues –

investment banking and trading down, but asset management up; 4) pickup in

mortgage banking; 5) seasonal rise in some fee income categories; and 6) continued

good credit quality. Institutional leveraged loan growth slowed sharply.

 Weekly Fed loan growth data muddied in 2Q at large banks by reconstitution,

impacting consumer loans, notably credit cards. We expect modest overall loan

growth. Higher refis boosted other loans and residential mortgages in the Fed data.

 Deposit costs likely to rise further but at a slower pace. Banks are cutting deposit

rates, but: 1) rates on new money are still above existing deposit costs; and 2) shift

from non-interest bearing deposits into interest bearing is slower but continuing.

 Expect banks will be less able to lower deposit costs than in last rate cut cycle

because they have: 1) lower share of higher rate deposits (e.g., CDs, money market

deposits); and 2) higher share of non-interest bearing deposits. Retail deposit costs

did not go up materially this rate hike cycle.

 Mortgage banking revenue likely to rise in 2Q and rise more in 3Q from higher

refis. This will boost origination revenues, but servicing revenue will partly offset

due to weaker net MSR hedging results and higher MSR amortization expense.

 Despite higher IPOs, investment banking fees are down, falling in most areas.

Announced M&A volumes remained strong – June was 3

best month since crisis.

Trading revenues are also down due to lower volatility and tough comps.

Selected Recent Reports:

Mortgage Banking: Benefit In 2Q, 3Q

From Spike In Refis But Partial Offset

From

Servicing, dated July 2, 2019

CCAR 2019: Dividends Up Solidly;

Total Capital Return Up Most At PNC,

Followed By Northern Trust And

BofA

, dated June 28, 2019

North America

Equity Research

09 July 2019

Vivek Juneja

(1-212) 622-6465

vivek.juneja@jpmorgan.com

Fed Loan Data Muddied: Other Loans Up Sharply, Most Consumer Loan Categories Up

 Total loans at large banks rose 2.0% qoq (+4.5% yoy) on period end basis through June 26

per Fed data, but trends were

muddied by reconstitution of the large banks group. QoQ trends were led by sharp growth in other loans – likely boosted by

growth in mortgage warehouse loans due to sharp jump in refis. Other consumer loans were also up strongly qoq and yoy.

 Reported credit card loan growth is muddy for 1Q and 2Q – we expect much more modest organic credit card loan growth

than reported growth due to the reconstitution noted above.

 C&I loans were up modestly by 0.5% qoq (+7.2% yoy), potentially due to a weaker M&A environment. However, C&I

plus other loans rose 1.7% qoq (+7.6% yoy) as all other loans grew 4.5% qoq, led by mortgage warehouse loans.

 Residential mortgages up strongly by 1.7% qoq, likely the result of mortgage pipeline growth from the pickup in refi

originations – these loans will be securitized into MBS.

 We expect average loan growth trends to be mixed at our banks – slower qoq growth at some banks (from loan sales at

some), but growth up at BB&T, US Bancorp, Citi, and PNC, with latter two driven by good period end C&I growth in 1Q.

Table

Weekly Fed Loan Data Muddied; 2Q Led by Sharp Growth in Other Loans, Other Consumer, and Residential

Mortgages

Large Banks’ period end growth, adjusted for M&A, as of June 26, 2019, NSA

Amount

($ bil)

QoQ Chg YoY Chg

2Q18 3Q18 4Q18 1Q19

(1)

2Q19 2Q18 3Q18 4Q18 1Q19

(1)

2Q19

(1)

C&I 1,301.4 1.9% 0.1% 6.1% 0.5% 0.5% 3.5% 4.3% 9.3% 8.7% 7.2%

Other

(2)

847.6 1.6% 0.6% 6.2% -2.1% 3.5% 7.0% 5.0% 7.7% 6.2% 8.3%

Loans to Non-Bank Financial Firms 349.2 5.1% 5.2% 7.9% 0.0% 2.2% 14.7% 15.0% 19.1% 19.2% 15.9%

All Other 498.3 -0.6% -2.3% 5.1% -3.4% 4.5% 2.6% -0.8% 1.0% -1.5% 3.6%

C&I Plus All Other 2,149.0 1.8% 0.3% 6.1% -0.5% 1.7% 4.9% 4.6% 8.7% 7.7% 7.6%

CRE 701.4 1.7% -0.7% 0.0% -0.1% -0.1% 1.0% 0.4% 0.6% 1.0% -0.8%

Resi Mtge 1,189.7 0.2% 0.7% -0.5% -0.4% 1.7% 2.6% 2.3% 0.4% 0.1% 1.5%

Home Equity 217.4 -3.4% -2.7% -2.3% -3.5% -2.7% -11.8% -12.0% -11.8% -11.3% -10.8%

Cards 665.4 2.8% -1.1% 5.5% -0.4% 7.5% 5.1% 2.0% 1.3% 6.9% 11.8%

Auto 356.5 0.1% 0.5% 0.1% 0.8% 2.3% 1.9% 0.9% 0.4% 1.5% 3.7%

Other Consumer 124.4 2.2% 3.1% 2.1% 1.3% 4.4% 4.7% 5.9% 8.4% 9.1% 11.5%

Total Loans

(3)

5,403.7 1.2% 0.0% 2.9% -0.4% 2.0% 2.7% 2.1% 3.2% 3.7% 4.5%

Source: Federal Reserve and J.P. Morgan calculations.

(1)

1Q19 qoq/yoy & 2Q19 yoy adjusted for M&A.

(2)

Other is the sum of Loans to Non-Depository Financial Institutions and All Other.

(3)

Excludes Fed Funds sold and reverse repos.

Table

Loan Growth at Our Banks Will Likely

e Mixed

Average total loan growth

QoQ Chg YoY Chg

4Q18 1Q19

(1)

2Q19E 2019E

BAC 0.4% 1.0% 0.6% 2.4%

BBT 0.9% 0.4% 1.6% 4.4%

C 0.8% 0.6% 1.4% 3.9%

CFG 1.7% 1.5% 0.2% 4.4%

FITB (ex MBFI) 1.6% 1.7% NA NA

PNC 1.2% 1.2% 2.4% 4.8%

RF 1.1% 2.3% 0.9% 4.7%

STI 2.5% 3.0% 1.2% 8.0%

USB 0.9% 0.9% 1.1% 3.6%

WFC 0.7% 0.4% 0.0% 1.0%

Median 0.9% 1.0% 1.1% 4.4%

Source: Company reports and J.P. Morgan estimates. FITB is adjusted to

exclude impact from its acquisition of MBFI.

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