Big Banks - Finance Sector

By pjain      Published July 14, 2020, 7:12 p.m. in blog Invest   

Major US Banks

  • ? Will regionals have an edge?
  • Big4 not really worth it - phe Delta posted $1.70 in adjusted earnings per share, benefiting from lower fuel prices and strong travel demand in its latest quarter.

Banks -- Own Selective PBCT WFC

  • Banks to be hurt with Lower Net Margins. Banks and insurance companies sold off when the yield curve flattened and briefly inverted last summer.
  • Economic growth will stay on track helping financials sector returns

x Risky International broken Negative interest rates

JPM - survivor c104 b95?

  • J.P. Morgan, buoyed by its performance in bond trading, reported earnings of $2.57 a share
  • one of 30 most favored by hedge funds

  • High priced

  • Best managed and highest quality bank in the world. Tailwinds of tax reform, GDP growth, de-regulation. Cheap valuation 3% dividend which is growing and 50% better than the 10-year treasury.

C x

  • Citigroup, powered by its bond trading and consumer businesses, showed earnings of $1.90 per share. ? ~other financials are phe
  • 30 top holdings by hedgies

BAC x

  • one of 30 most favored by hedge funds

GS - phe

WFC x c44 b40 y5%?

H1'20 Wells Fargo missed on both the top and bottom lines.

  • Low interest rates negatively impacted business.
  • saw legal fees eat earnings away
  • Six months in to split from 3 to 5 product line divisions. The changes are “designed to create a flatter line of business organizational structure and provide leaders with clear authority, accountability and responsibility,

Q4'2019 new CEO - little management/changes, FED penalized 2yrs in!

  • Oct'2019 Charles Scharf, from jpmorgan
  • Feb'20 first major reshuffle - but NOT a major restructuring
  • NEED: to rebuild its reputation and increase accountability

SEG: Consumer Lending - Mainly Mortgage

  • JPmorgan's 16yr veteran Mike Weinbach to join wells
  • Split out in Feb2020 splitoff from 3 to 5 divisions

SEG: Retail Banking

  • Spun out from earlier Consumer (now Consumer lending) in Feb2020 splitoff from 3 to 5 divisions

SEG: Commercial banking unit

  • split from wholesale unit in Feb2020 splitoff from 3 to 5 divisions

SEG: Corporate and investment banking unit

  • split from wholesale unit in Feb2020 splitoff from 3 to 5 divisions

SEG: Wealth Management division

  • Exec left the unit to join corporate/wholesale lunit
  • Left unchanged in Feb2020 splitoff from 3 to 5 divisions
  • The bulk of Wells Fargo’s non-retail operations and its 2,900 employees in Winston-Salem involve wealth and investment services. The unit includes Wells Fargo Advisors, The Private Bank, Abbot Downing and Wells Fargo Asset Management.

Reduced Innovation

  • Disbanded its Payments, Virtual Solutions and Innovation Group - Strategy, Digital Platform & Innovation focused on digital strategies and customer experience.
  • Chief Operating Officer Scott Powell, a former JPMorgan and Santander executive, will run the unit until a permanent replacement is found.

KEY: Cross selling across Accounts

A key part of Wells Fargo's business strategy is cross-selling, the practice of encouraging existing customers to buy additional banking services. Customers inquiring about their checking account balance may be pitched mortgage deals and mortgage holders may be pitched credit card offers in an attempt to increase the customer's profitability to the bank.

Little global presence or growth - only Customer Service

They operate back-offices in India and the Philippines with more than 20,000 staff.

Causes of Wells Stagnation and 2001-2017 scandal - PROVE TO FED CHANGES SUFFICIENT

2011-2017 QUOTA SYSTEM at Root - Scandal still STUNTS - limited asset to $2T

  • Customer-account scandal that surfaced in September 2016
  • Scandal involving the creation of over 2 million fake bank accounts and illegal manipulation of other accounts
    • eg Sending multiple Wells Debit cards that are unwanted in mail
  • From 2011 into 2016 Wells Fargo fired more than 8,500 people for falling short.
    • They went into unemployment claims - Wells lost all of them!
    • To get UE, told of unreasonable sales quotas, daily micromanagement, routine firings, employee hazing
  • Wells Fargo fell behind Bank of America to third by bank deposits in 2017 and behind Citigroup to fourth by total assets in 2018
  • Since 2000 QUOTA SYSTEM at Root - Just about everybody who worked directly with customers
  • 2007 LOTS OF EMPLOYEES complained on internal hotline
  • 2009 senior management found out that employees were getting into trouble - bosses wanted 120% of Quota performance
  • 2017-H2 FIXes
    • When a new account is opened, the customer gets an email notification. Credit card applications also will need documented consent, the bank said.
    • Ended the sales program at the Community Banking division — linking incentive compensation to customer service instead of sales.
  • Feb 2, 2018, the US Federal Reserve Bank barred Wells Fargo from growing its nearly US$2 trillion-asset base any further, based upon years of misconduct, until fixes its internal problems to the satisfaction of the Fed
  • Apr 2018 DOL probed pushing its customers into more expensive retirement plans as well as into retirement funds managed by Wells Fargo itself.
  • May 2018 WSJ reported improperly altered documents about business clients in 2017 and early 2018

Little Bank CXO prosecution

  • Getting the CEO fired is one thing; finding them criminally responsible for that crime is far harder
  • Regulator OCC > “Hundreds of thousands of employees in the Bank’s largest line of business engaged in systemic illegal activity for 14 years.”
  • Fines on 5 former CXOs of Wells - CEO John Stumpf settled with $18m fine/ban for life, Carrie Tolstedt $25 m fighting

GOVERNANCE PROBLEM: Board sleeping, Bad Management

  • The bank’s 15-member board now has 14 independent directors and one insider, COO Sloan
  • The roles of CEO and chairman have been separated, and by-laws have been changed to make sure the chairman is an independent director.
  • Centralizing the control functions and has created a new Office of Ethics, Oversight and Integrity.

  • Wells Fargo: What It Will Take to Clean Up the Mess - Knowledge@Wharton

About

  • HQ SFO
  • 4th largest bank globally by assets, market cap - slipped behind JPM
  • As of June 2018, it had 8,050 branches and 13,000 ATMs.
  • In 2018 the company had operations in 35 countries with over 70 million customers globally.
  • December 2018, the company had a Standard & Poors credit rating of A−.

2007 only AAA rated bank, Wachovia acq

  • Dec 2009 Wells redeemed $25b preferred back to Treasury , including some dividends ending up giving govt $1.5b in divs on $25b
  • Oct 2008 Wachovia acq for $15b all stock - Fed had tried to get Citigroup buy it for $2b - but WFC swooped in at 7x offer
  • Oct 2008 Tests had indicated it needed additional $14b and it got $25 emergency funding obtained from Treasury,
  • 2007, the company was the only AAA-rated bank, reflecting the highest credit rating from two firms.

International Majors

HSBC x brexit and euro-pain severe

DB XX Germany

=== Regionals Financials/Banks

NTRS x c103 m23 y2.1% +6.5%

Ranked the best private bank in the US in eight of the past nine years. This leading wealth manager primarily serves corporate pension funds, institutional clients and affluent families. The bank has operations worldwide and holds $10.7 trillion of custodial assets.

Northern Trust’s growth has resulted from embracing industry trends in passive investing and alternative asset management, developing new AI and robotics technologies for managing wealth, and helping clients navigate an increasingly complex regulatory environment with tax-efficient vehicles and risk management tools.

The bank grew EPS 14% last year and 48% during the first six months of 2018. RoE, a key bank profitability measure, has been rising steadily from 9.3% in 2012 to 12.6% last year and 16% in the first half of 2018.

Northern Trust’s annual dividend growth rate has improved from 6.4% in the last five years to 7.2% in the past three years and 11% this year. With dividend payout held to just 26% of earnings, this wealth manager has ample capacity for additional growth.

PBCT R5 y4.2% 25y/ M=6.3b New England Regn

  • EPS avg5yrF=14%

  • 400 branches in Connecticut, New York, Massachusetts, Vermont, New Hampshire and Maine – has $48 billion in total assets. institution traces its roots back to 1842.


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