HBC

Visa Is a Great Company

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Image Shown: Visa Inc’s operations are on the rebound, though meaningful headwinds remain. Image Source: Visa Inc – Fourth Quarter and Full-Year Earnings for Fiscal 2020 IR Presentation By Callum Turcan We have been big fans of Visa Inc (V) for a long time and continue to include shares of V in our Best Ideas Newsletter portfolio as a top-weighted holding. Visa reported its fourth quarter and full-year earnings for fiscal 2020 (period ended September 30, 2020) in late October, which as expected saw the firm’s financial performance face significant headwinds due to the coronavirus (‘COVID-19’) pandemic. However, Visa’s outlook has improved tremendously during the past month as it appears there is a good chance that a safe and viable … Read more

Normalizing our Fair Value Estimates for the Money Center Banks

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Image Source: Mike Cohen By Brian Nelson, CFA In March, during the depths of the COVID-19 meltdown, we trimmed our fair value estimates for many financials and money center banks. The reasoning was rather straightforward. Our base-case projections for the group were lowered as a result of our expectations of a global economic recession. We factored in higher credit losses due to our anticipation of slowing economic activity that would be triggered by consumers staying at home to avoid COVID-19. We also considered the impact of net interest margin (“NIM”) compression that would result from expectations of a sustained ominous inverted yield curve, and in light of heightened uncertainty regarding the fatality rate of the virus itself (at the time), … Read more

JPMorgan, Citigroup Third Quarters Not Terrible, But Still No Reason to Own Financials

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Image: Banks and financials were among the most aggressively beaten down groups during the COVID-19 crash, and the sector failed to participate meaningfully in the bounce back. The leveraged and arbitrary nature of banking business models makes them much less attractive than entities with strong net cash positions on the balance sheet and solid expected future free cash flows. Source: Kastner, David, Charles Schwab. “Schwab Sector Views: Changes Are Coming.” 18 June 2020. By Brian Nelson, CFA Better-than-feared third-quarter reports are not going to change our minds on the banking and financials sector. The group has been among the worst performing sectors amid the COVID-19 market crash and failed to bounce back meaningfully since the March bottom. Banks are being … Read more

Goldman Posts a Blowout Quarter

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While we still do not like the private ($17 billion) and public equity ($3 billion) positions on Goldman’s balance sheet, we acknowledge that the firm is working them lower through sales and that the bank is aiming to increase managed funds instead. This move is overdue and will help reduce the risk profile of the firm. Though the quarter showed the massive revenue potential of Goldman when markets are at fairly high levels and with extreme volatility, it is difficult to value these earnings streams, given the notoriously volatile nature of the key segments of investment banking and markets (trading). By Matthew Warren Goldman Sachs (GS) posted blowout second-quarter results July 15 thanks to its notoriously volatile Markets and Investment … Read more

Banks & Money Centers Industry Report

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Select the link to download the pdf report below. Thank you! We’ll talk about how banks make money, and the three most important costs of running a bank. The Great Financial Crisis revealed the tremendous risks of banking equities, and we’ll walk through these in depth. We’ll discuss how to conceptualize where we are in the banking cycle, and how that helps inform our valuation process for banks, which is different than traditional operating entities. The stress tests have helped many of the big banks from pursuing hazardous endeavors during the past decade, and we’ll go into how to think about the yield curve in the context of banks. Investors should expect ongoing digitalization of banks and increased M&A as … Read more

Morgan Stanley Puts up a Tremendous Quarter

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Morgan Stanley truly shined during this quarter of extreme volatility. While credit provisioning was higher year over year, Morgan Stanley simply does not have many of the credit exposures that are leading to huge multi-billion-dollar credit provisions at some of its money-center banking peers. Though its wealth management business’ net income (applicable to Morgan Stanley) was down 10% year over year, and Investment Management was up only 20%, it was the Institutional Securities stunning 95% advance in net income that made this quarter a (temporary) gem of notable brilliance. By Matthew Warren Morgan Stanley (MS) put up a tremendous quarter July 16, blowing away analyst consensus estimates on both the top and bottom lines. As you can see in the … Read more

Bank of America is Working Through a Difficult Time

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When putting all the puzzle pieces together, we see Bank of America facing the headwinds of low rates and sizable credit provisioning with relative ease thanks to its substantial pre-tax, pre-provision earnings power. As long as the economy doesn’t get drastically worse from here, long term investors will benefit from normalized valuations on more normalized earnings in the not-too-distant future. By Matthew Warren Bank of America (BAC) posted difficult second quarter results July 16, though it beat analyst consensus estimates on both the top and the bottom lines. As you can see in the upcoming graphic down below, total revenue was down 3% compared to last year while net income was down 52% thanks to substantial provisioning for future credit … Read more

Citigroup Navigating the Banking Downturn Fairly Well

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All in all, we think Citigroup management is doing a decent job of navigating this economic downturn. The shares trade at a discount to tangible book value. We think a large part of the reason for this is that this is a very complex bank, operating across a wide variety of products and geographies. If the team can make it through this downcycle without any skeletons coming out of the closest, we think the stock has the potential to re-rate higher. By Matthew Warren On July 14, Citigroup (C) posted a difficult second-quarter set of results, though the firm did manage to beat analyst consensus estimates on both the top and bottom lines. Outsize revenue gains in investment banking and … Read more

JPMorgan Reports Second Quarter, Notes Peculiar Times

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Image Shown: Overview of JPMorgan’s 2Q2020 earnings. Image Source: JPMorgan 2Q2020 Earnings Presentation There was a fair amount of discussion on JPMorgan’s conference call about how the company (and the rest of the banking industry) are taking large provisions now for charge offs that they expect to come in the future. The future and the timing and magnitude of the eventual write-offs are quite murky indeed, which helps explain the volatility of banking shares in general, and especially for those institutions that might fall over in an “adverse scenario.” JPMorgan is not one of those banks that is at risk. It stands on high ground in the industry thanks to its scale, diversification (a huge benefit this quarter), high quality … Read more

Wells Fargo Has Become An “Epic Disappointment”

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Wells Fargo is so far out of line with its large US banking peers that it is truly competing with one arm tied behind its back. Or perhaps both arms. While some might try to be heroic and bet on a huge turnaround, we think it is more prudent to watch from the sidelines. What an epic disappointment this bank has become, so far a fall from grace as compared to when it used to be regarded as one of the best in class of the biggest US banks. What a shame! By Matthew Warren Wells Fargo (WFC) delivered a stinker of a second quarter July 14, missing on both the top and bottom lines, and cutting the dividend by … Read more