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Banking Sector Report – January 2019
probability of US recession in 2019. Our top peaks remain Bank of America (BAC), JP
Morgan Chase (JPM), Wells Fargo (WFC), Citizens Financial (CFG) and Regions
Financial (RF).
Also, there are investor concerns around leveraged loan market which more than
doubled since the last crisis. So, we saw a number of questions to mgmt of US banks
regarding state of the leveraged loan market during the last earnings season. Even the
Federal Reserve expressed concerns around these markets in its last Financial Stability
Review. All the concerns are justified given skyrocketing growth of these loans and CLO
markets in recent years, deterioration of credit standards for new leveraged loans, the Fed
tightening cycle. So, leveraged loan spreads skyrocketed during December sell-off on the
financial markets. But, despite all this, we agree with the comments of the management of
US banks that the risks are more than manageable given relatively low exposure of banks
on leveraged loans, still strong financial health of US companies, low risk of recession in
the next 12 months and higher capital levels of US banks vs pre-Great Recession.
The beginning of the year for European banks was also relatively strong after three
consecutive months of negative performance in absolute terms. However, banks
again underperformed the broad market for the second month in a row. In result, banks
underperformed the broad market by 17.1% in 2018. Despite solid growth in January, it
remains near the lowest level for more than two years. Absolute January performance of
SX7P index was +4.7% MoM or +0.7 std from the mean and this result is in the top 21%
of absolute monthly performance of SX7P since the index inception. So, relative monthly
performance was -1.4% MoM or -0.3 std and it is in the bottom 33% of relative monthly
performance.
The key underperformers among European banks were small Italian banks because
the ECB’s new requirements to coverage of NPLs. Given the high level of NPLs, low
level of coverage and technical recession in Italy, Ubi Banca and BPER declined by
around 12% in January. In turn, the key outperformers (Julius Baer, Lloyds and BBVA)
increased by more than 11% MoM each.
European economic data disappointed again in January but loan growth rates
remain pretty solid in both corporate and consumer segments. European real GDP
growth of +0.2% QoQ or +1.2% yoy in 4Q18 was in-line with expectations but it is the
lowest figure on yoy basis over the last 5 years. Moreover, Italian GDP decreased by
0.2% QoQ, the second month in a row implying technical recession in the country.
European composite PMI, which is well correlated with GDP growth, decreased again in
January, the fifth month of a decline in a row. The figure decreased on MoM basis in 10
months out of last 13. It was just 50.7 pts, -0.4 pts MoM vs expectations of 51.4 pts, more
than a five-year low. Both manufacturing PMI and services PMI declined. Manufacturing
PMI in Germany already declined below 50 pts in January while German industrial
production went down by 1.9% MoM in November as well as in Spain and Italy.
ECB admitted that recent weak macro data may suggest some slower growth
momentum ahead and that the risks surrounding the euro area growth outlook have
moved to the downside but the risk of recession is still low as “financing conditions,
favourable labour market dynamics and rising wage growth continue to underpin the euro
area expansion”. However, if macro data continues worsening, we don’t exclude that the
ECB’s forward guidance will change as late as at March meeting. Also, it seems that the
market expects announcement of TLTRO extension already in March. In any case, it was
dovish meeting and the probability of start of ECB’s hiking cycle in 2019 declined again,
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Banking Sector Report – January 2019
implying relatively lengthy period of challenging revenue environment for European banks.
The key February event for EU financial industry will be the continuation of earnings
season which began in late January. But we don’t expect that it will be a game changer for
EU banks given weak macro data and still high level of political uncertainty. It is very
bumpy road ahead for EU banks in 2019 and we continue to prefer US financial
institutions over EU ones at the current moment.
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Banking Sector Report – January 2019
1. MARKET PERFORMANCE
US
US banks significantly outperformed the broad market on MoM basis in January after very
weak performance in December when banks tumbled by 15.5%. Thus, banks showed the
strongest monthly performance since the election rally of 2016. But BKX index
underperformed SPX index in five months over the last 9 and it underperformed the broad
market by 14.3% in 2018. In December, US banks skyrocketed by 12.4% MoM vs +7.9% of
SPX index. Absolute December performance on MoM basis was +1.8 StD from the mean
and it is in the top 4% of the absolute MoM performance of BKX index. Relative December
performance was +4.2% MoM, it is +0.9 StD from the mean and it is in the top 15% of
relative MoM performance vs SPX.
Dynamics within the sector was uniform with positive performance of all members of BKX
index. The key outperformer was Synchrony Financial which added more thanof market
cap in January due to good quarterly results. In turn, PNC Financial increased only by 4.9%
MoM despite relief rally as its 4Q18 results missed expectations.
Chart 1.1. US Banks Performance. BKX Index vs S&P500 & S5FINL Indexes
Source: Bloomberg
Chart 1.2. January US Banks Performance. Leaders and Laggards, 1Month Performance,%
Source: Bloomberg
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