Академический Документы
Профессиональный Документы
Культура Документы
Equity Research
UCMBs' Euro-Zone And Derivatives Exposures
We Believe Market Over-Reaction Has Occurred, But Data Is Sparse Reconciling MS' Regulatory Data With Its Company Disclosures Sector Rating: U.S. Banks, Market Weight
Company Name U.S. Banks Bank of America Corporation (BAC) Citigroup Inc. (C) JPMorgan Chase & Co. (JPM) Morgan Stanley (MS) The Goldman Sachs Group, Inc. (GS) Price Rating 09/30/11 2 2V 1 2 1 $6.12 25.62 30.12 13.51 94.55 FY EPS 2011E 2012E ($0.14) 3.80 5.15 1.25 10.50 $1.45 4.70 5.90 2.95 18.00 FY P/E 2011 2012 NM 6.7x 5.9x 10.8x 9.0x 4.2x 5.5x 5.1x 4.6x 5.3x
Source: Company data and Wells Fargo Securities, LLC estimates 1= Outperform, 2 = Market Perform, 3 = Underperform, V = Volatile, = Company is on the Priority Stock List NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful
Regulatory Data Suggests Q2 Exposures To The Peripheral Euro-zone Countries Actually Increased From Q1 But Net Exposures Appear Much More Manageable. Recently released regulatory data for Q2 2011 show that gross cross-border exposure to the five most challenged Euro-zone economies totaled $226B at Q2 2011, up 13% Q/Q. Using FFIEC data, we estimate MS' exposure is the highest of its peers at 96% of Tier 1 common capital (T1C) at Q2 2011. However, if we estimate 100% loss of each company's stated net credit exposure to these five countries and all hedges prove worthless, we estimate the average reduction to TBV would be 7% and T1C capital ratios remain well positioned ahead of Basel III. We estimate MS pain would be in line with its UCMB average of 7% (BAC is more exposed and GS least exposed of the peer group). Also, we do not believe losses on these exposures would drive a material change in the TBV of our UCMBs. Still, actionable information on these exposures remains sparse, heightening investors concerns about this volatile situation. MS French Exposure Appears To Be Quite Manageable, At Slightly More Than $1B Before Hedges/Collateral. We have used MS' disclosure of its exposure to France to illustrate the differences between regulatory "exposure" and actual credit risk. We estimate MS' exposure to France is $2.4B before hedging benefits and $1.4B net of hedges. We believe MS' estimate of no net counterparty exposure to France excludes potential funding of currently unfunded corporate loans. We believe MS' exposure has been overly discounted by the market in recent weeks. The Markets Newest Concern Derivatives Is Also Overblown, In Our View. More recently, investors have become concerned about outstanding derivatives positions of the UCMBs. According to the OCC, 97% of the notional value of outstanding contracts is eliminated from bilateral netting and high quality collateral held against counterparty risks. Losses typically do not exceed 20bps of net credit exposure. Specifically, MS' net credit exposure to derivatives was 1% of Tier 1 common capital at Q2 2011, a level visibly below its peers. We prefer JPM and PNC for defense and GS as a more cyclical play in the UCMBs. We still prefer more defensive names (JPM), as we remain more cautious on the UCMBs in the near-term due to the increased headline risks vs. the large-cap regional banks in our coverage (we prefer PNC). MS' volatility remains a concern though current valuation is low vs. peers and its own history.
Matthew H. Burnell, Senior Analyst ( 2 1 2) 2 1 4 -5 0 3 0 / ma tt. bu rn e ll @ w el ls f a rgo . c o m Herman Chan, CFA, Associate Analyst (21 2) 214 - 80 37 / h e rm a n . c h a n @ w el l s f a rg o . c o m Jason Harbes, CFA, Associate Analyst (21 2) 214 - 8068 / ja so n . h a r b es @ w el ls f a rgo . c o m
Please see page 9 for rating definitions, important disclosures and required analyst certifications
Wells Fargo Securities, LLC 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 the report and investors should consider this report as only a single factor in making their investment decision.
U.S. Banks
Regulatory Data Suggests Q2 Exposures To The Peripheral Euro-zone Countries Actually Increased From Q1 But Net Exposures Appear Much More Manageable
On September 30, U.S. banking regulators released updated cross-border exposure information for U.S. banks as of June 30. U.S. banking regulators (FFIEC) released an updated Country Exposure Information Report (CEIR), stating exposures for U.S. banks as of June 30, 2011. Exposures stated in the CEIR are provided on a relatively gross basis and are broken down in two ways: Part A provides specific country exposures exceeding 1% of assets or 20% of capital; and Part B, providing an aggregate amount of exposure to all the countries where a bank has exposure of 0.75% to 0.99% of assets or 15% to 19% of capital (in this case the countries are listed but no specific breakdown of the exposure is provided). We believe the FFIEC data materially overstates the actual credit risk embedded in banks cross-border exposures. Under FFIEC guidelines, international exposure includes cash (including client cash balances), receivables, securities purchased under agreements to resell, securities borrowed (based on counterparty domicile) and cash financial instruments, but exclude derivative instruments, commitments and collateral posted by counterparties in support of trades. Finally, we note that the CEIR data can be meaningfully skewed by the inclusion of secured financing trades, even when the gross risk is less than the collateral backing the transaction. Gross exposure of 10 large U.S. banks to the peripheral Euro-zone countries has actually increased in 2011, but appears to remain relatively modest compared to all non-U.S. exposure. As illustrated below, total stated exposure across the largest 10 U.S. banks totaled $226B at June 30, 2011, up 10% from the prior quarter-end, and 23% higher than FYE 2010. The exposure as a percentage of total nonU.S. exposure is now a relatively modest 6%, up from slightly below 5% at the end of 2010. Exhibit 1: Large U.S. Banks Exposures To Peripheral Europe Has Increased Since FYE 2010
Large U.S. Banks' Exposure To Peripheral European Countries 250 7 10 61
7.0% 6.0% 5.0% 4.8% 5.8% 5.4%
7 10 66
% of Total
Large Financial Institutions include: BAC, BK, C, DB, GS, HSBC, JPM, MS, SST, and WFC. Source: FFIEC Country Exposure Information Report, Wells Fargo Securities, LLC
Large Financial Institutions include: BAC, BK, C, DB, GS, HSBC, JPM, MS, SST, and WFC. Source: FFIEC Country Exposure Information Report, Wells Fargo Securities, LLC
MS appears to have meaningful exposure to peripheral Euro-zone countries, using FFIEC data.... Looking specifically at our universal/capital markets banks (UCMBs) exposure as reported by the FFIEC), exposures have generally increased at June 30, 2011 compared to the prior quarter-end data. As a percentage of Tier 1 common capital, MS appears to have a visibly higher exposure to these countries than the other UCMBs (both in Q2 2011 and Q1 2011) by our estimate. .But banks reported exposures appear visibly lower than estimated exposures from the FFIEC. We believe MS exposure similar to the exposures of other UCMBs is materially overstated by the FFIEC data, as illustrated in Exhibit 5 on page 3, however. MS estimates its exposure to the peripheral European countries as of June 30 totaled approximately $5B a figure 88% below the $42B estimated from the FFIEC data as of June 30. We note that in most cases the banks reported exposure to these five countries at the end of Q2 2011 is visibly below the figures estimated from the FFIEC data as of the same date. As well, the companies have been keenly aware of these exposures for well more than a year, suggesting potentially higher-risk exposures to counterparties in these countries have been reduced over that time, in our view. As a result, we believe the net exposures reported by MS and the other UCMBs are plausible values.
Exhibit 5: Gross Credit Exposures Appear Lower Than FFIEC Data Suggests
Peripheral Country Exposures - UCMBs FFIEC Vs. Company Data (Q2 2011) 45 40 35 Exposure ($MM) 42.5
Exhibit 6: With Net Exposures Even Lower (After Accounting For Collateral & Hedges)
Peripheral European Exposure - UCMBs Gross vs. Net Exposures (Q2 2011) 18 16 14 Exposure ($B) 16.9 14.0 13.5
30 25 20 15 10 5 0 MS (1) GS (2) FFIEC JPM (3) C (4) BAC (5) 5.0 24.5 19.2 14.0 14.413.5 16.9
3.1 NA
2 0 BAC JPM C
MS Net Exposure
GS
Gross Exposure
Gross Exposure
Company data stated in Q2 2011 10-Q reports and is stated exclusive of unfunded commitments and collateral or hedges that may be in place to further reduce net credit risk, as applicable. Source: FFIEC Country Exposure Information Report, Wells Fargo Securities, LLC
Net exposure includes hedges or collateral held against the stated gross exposure. Net exposure for BAC, C, and JPM estimated to be 50% of stated gross exposure in Exhibit 5 (this is the average of the reduction for GS and MS). Source: FFIEC Country Exposure Information Report, Wells Fargo Securities, LLC
Should the UCMBs face a 100% loss of net peripheral Euro-zone exposures, we estimate the effect on stated Tier 1 common capital ratios and TBV/share should be modest. Assuming a complete loss on each companys estimated net exposure, we estimate the reduction to tangible book value from such a scenario would be approximately 3% (on average), with BAC at the high end (5%) and GS at the low end (2%). We note that in contrast to recent market speculation, the hit to MS TBV would be in line with the peer group average of 3%. In all cases, such a scenario does not appear to meaningfully change price/TBV ratios for any of the UCMBs. Exhibit 7: Net Exposures to Peripheral Euro-Zone Countries Appear Manageable
$MM Net Exposure - Peripheral Europe 100% Loss (Assumes 30% tax rate) Tier 1 Common Capital - Q2 2011 RWA (Basel I) - Q2 2011 T1CC Ratio - Q2 2011 Adj. T1CC - Proforma (Q2 2011) Adj. T1CC Ratio (Basel I) Est. change in T1CC Ratio (bps) $ $ BAC 8,473 5,931 $ $ C 6,750 4,725 $ $ GS 1,830 1,281 $ $ JPM 7,000 4,900 $ $ MS 2,000 1,400
$ 114,684 $ 115,359 $ 58,265 $ 121,209 $ 44,495 $ 1,392,747 $ 992,567 $ 451,010 $ 1,198,711 $ 304,762 8.2% 11.6% 12.9% 10.1% 14.6% $ 108,753 $ 110,634 $ 56,984 $ 7.8% 11.1% 12.6% (43) (48) (28) 128,171 10,133 12.65 144,834 2,918 49.64 64,069 527 $ 121.60 116,309 $ 43,095 9.7% 14.1% (41) (46) 123,262 3,910 31.52 51,339 1,929 26.61
$ 114,684 $ 115,359 $ 58,265 $ 121,209 $ 44,495 $ 1,392,747 $ 992,567 $ 451,010 $ 1,198,711 $ 304,762 8.2% 11.6% 12.9% 10.1% 14.6% $ 102,822 $ 105,909 $ 56,074 $ 7.4% 10.7% 12.4% (85) (95) (49) 128,171 10,133 12.65 144,834 2,918 49.64 64,069 527 $ 121.60 111,409 $ 40,995 9.3% 13.5% (82) (115) 123,262 3,910 31.52 51,339 1,929 26.61
TBV - Q2 2011 Shares Outstanding - Q2 2011 (EOP, MM TBV/Share - Q2 2011 $ Adjusted TBV- Proforma (Q2 2011) Adjusted TBV Estimated % change in TBV Closing Price - 9/30/11 Price/Adj. TBV Current Price/TBV $ $
TBV - Q2 2011 Shares Outstanding - Q2 2011 (EOP, MM TBV/Share - Q2 2011 $ Adjusted TBV- Proforma (Q2 2011) Adjusted TBV Estimated % change in TBV Closing Price - 9/30/11 Price/Adj. TBV Current Price/TBV $ $
122,240 140,109 62,788 118,362 49,939 12.06 $ 48.02 $ 119.16 $ 30.27 $ 25.89 -5% -3% -2% -4% -3% 6.12 $ 51% 48% 25.62 $ 53% 52% 94.55 $ 79% 78% 30.12 $ 100% 96% 13.51 52% 51%
116,309 135,384 61,878 113,462 47,839 11.48 $ 46.40 $ 117.44 $ 29.02 $ 24.80 -9% -7% -3% -8% -7% 6.12 $ 53% 48% 25.62 $ 55% 52% 94.55 $ 81% 78% 30.12 $ 104% 96% 13.51 54% 51%
Net exposures as stated in Exhibit 6. Source: Company data, Wells Fargo Securities, LLC
U.S. Banks
Even assuming a full loss on stated gross exposures, we estimate Tier 1 common capital ratios and TBV would not be substantially reduced from current levels. If we assume a scenario where all hedges and collateral held against peripheral European exposure are worthless (i.e., a total loss of stated gross exposure), we estimate the average reduction to TBV would be 7%. Again, we estimate MS pain would be in line with its UCMB average of 7% with BAC more exposed and GS least exposed of the peer group. More importantly, even in this draconian scenario, we do not believe losses on these exposures would drive a material change in the tangible book value (TBV) of our UCMB coverage universe. Finally, while we appreciate investors desire to consider worst case scenarios, we believe an environment in which 100% of hedges and collateral are worthless is likely to be the case in a market environment of much broader financial pain across most major financial institutions.
MS French Exposure Appears To Be Quite Manageable, At Slightly More Than $1B Before Hedges/Collateral
Trying to reconcile FFIEC data with MS stated exposures to France we believe gross exposure could be $2.4B. In our view, MS disclosure of exposure to France is better than its UCMB peers, allowing us to try to reconcile FFIEC data with MS managements statement of no net exposure to French counterparties. As illustrated below, we estimate MS exposure to France is approximately $2.4B before hedges and could be $1.4B or less if hedges in place at 6/30/11 were to prove effective. We note that of the $2.4B of estimated gross exposure to French counterparties at June 30, 2011, roughly $1.oB resulted from estimated drawdowns of currently unfunded corporate loans a figure MS does not include in its calculation of cross-border exposure to any country. Regulatory data on foreign exposures is not an accurate representation of actual credit risk or exposure, in our view. Per the 6/30/11 CEIR, MS' gross exposure to France totaled $40.6B--$28.1B to banks, $2.8B to public sector entities, and $5.3 to other borrowers. Again, we emphasize this data is stated on a gross basis, similar to the reported exposures to peripheral Europe. As a percentage of MS Tier 1 common capital at the same date ($44.5), exposure to France totaled 91% - though looking at the individual components of the exposure in a manner similar to MS peripheral Euro-zone exposures, we believe MS exposure is substantially more manageable than this number suggests. Funded corporate loan exposure was less than $0.5B at Q2 2011 with unhedged total corporate loan exposure aggregating to $1.5B. In its Q2 2011 10-Q filing, MS stated that 3% of its corporate lending exposure was to borrowers domiciled in France. Since MS had total funded corporate loan exposure of $14.3B at June 30, this implies MS corporate loan exposure to French borrowers including corporations and financial institutions totaled approximately $430MM (calculated in a manner similar to the gross exposure totals for the peripheral Euro-zone countries of $5B). At the same date, MS total unfunded commitments totaled $71.7B. Again applying the 3% exposure and assuming 50% of the commitments would be funded in a meltdown scenario (a situation we consider very conservative due to MS ability to withhold funding due to material weakening of the counterparties creditworthiness), this could increase MS corporate loan exposure to France by $1.1B, driving estimated aggregate corporate loan exposure to French counterparties to $1.5B. Hedges likely reduce MS estimated corporate loan exposure to no more than $0.4B. At June 30, 2011, MS had $34B of hedges against its corporate loan exposure. If we use a similar percentage for the hedges MS has put into place on its aggregate corporate loan portfolio ($34B x 3%), this reduces exposure by $1.0B, cutting MS overall exposure to less than $0.5B. We believe any hedges MS may have against these exposures are with counterparties outside of France, similar to its peripheral Euro-zone exposures. This does not include sovereign exposure, however, which MS has not disclosed. OTC derivative exposure is less than $0.2B before hedges. Separately, MS disclosed in its 10-Q filing for Q2 2011 that 3% of total OTC derivative exposure was to France at June 30. At the same date, net OTC derivatives totaled $6.8B assets of $42.5B less liabilities of $36.3B suggesting that net OTC derivative exposure to France totaled $186MM at June 30. We note that this exposure is stated before the benefit of hedges MS may have placed on these exposures (but which the company has not separately disclosed). MS French exposure seems a manageable $0.6B before sovereign exposure (but which is likely also hedged). So, in the end, using MS own definition of gross and net exposure from its disclosures on peripheral Euro-zone countries, we estimate that MS exposure to France is a very manageable $620MM (funded corporate loans plus net OTC derivative exposure before hedges) before sovereign exposure. Additionally, we believe the company has used additional hedges or collateral to further reduce its net exposure to an even lower amount.
We estimate sovereign exposure at $0.7B. MS has not provided its French sovereign exposure. However, we estimate the exposure could be approximately $0.7B using a similar percentage to our estimated $620MM exposure to corporations and financials relative to the reported exposure in the 3/31/11 CEIR for banks and other of $26.6B, or 2.3%. Multiplying this percentage against the $2.7B of reported exposure to public sector entities at 3/31/11 implies sovereign exposure could be about $60MM, though we believe this is overly optimistic. As a result, we assume sovereign exposure to France would be approximately 25% of the CEIR level, or about $680MM before hedges. Applying conservative (but unlikely) scenarios suggests reasonable worst case exposure is less than $2.4B. Taking each of the exposures noted above funded and unfunded corporate loan exposure ($1.5B), OTC derivative exposure ($0.2B) and sovereign exposure (0.7B), we estimate MS exposure to French counterparties without the benefit of collateral or hedges would be approximately $2.4B. This amount equates to 4.5% of MS Tier 1 common capital at June 30, 2011 in a likely worst-case scenario. More positively, if MS hedges are effective, its net exposure falls to no higher than about $1.4B, or 3.2% of Tier 1 common. While this level is higher than the companys estimate of no net exposure to French counterparties, it appears far less worrisome than many market participants may have estimated. Situation is hardly new and we are confident that MS risk management has been proactively monitoring the companys exposures. Finally, like its exposures to the peripheral Euro zone countries, we are highly confident that MS risk management has been proactively monitoring these exposures and emphasizing caution across its business units. We would also believe that the French government would be likely to support its banks, though we acknowledge the riskiness of assuming such support for a non-French creditor would be forthcoming in a truly worst case scenario. Exhibit 9: MS T1C Ratio Was The Highest Of Our Coverage Universe At Q2 2011
Tier 1 Common Capital Ratio Q4 2008 vs. Q2 2011
14.6%
Exhibit 10: MS Has Maintained A Slightly More Liquid Balance Sheet Than Peers, Too
Balance Sheet Liquidity (Q2 2011) $2,500 25.0% Liquidity Reserve % Assets
12.5%
9.6% 12.0%
11.6%
11.0%
10.5%
10.5%
10.1%
10.6%
7.1% 9.6%
9.2%
$2,000 17.8%
20.0%
8.5%
9.2%
8.4%
7.1%
7.0%
8.1%
8.2%
5.6%
5.8%
5.1%
4.8%
6.2%
$1,500 $B
15.0%
4.8%
4.4%
2.3%
$1,000 $402
$831 $404
10.0%
$500
$334 $171
FI TB
S TI U S B
(1 )
B A C
A V G
N C
K EY
B B T
FH
C M
M S
JP
(2
Q4 08
Q2 11
Total Assets
(1) Stated as of Q3 2009, MS first disclosure of the ratio. (2) Stated as of Q1 2009, from earliest available data. Stated on a Basel I basis for all companies. Source: Company data, Wells Fargo Securities, LLC
MS has materially boosted its capital ratios and maintained exceptional amounts of liquidity as well, partly in response to growing European risks. As illustrated above, MS Tier 1 common capital ratio at June 30, 2011 was 14.6% (under Basel I), the highest of our coverage universe (and 650 bps higher than Q3 2009). Also, MS has maintained a somewhat higher excess cash reserve than its universal/capital markets bank (UCMB) peers at Q2 2011: at June 30, its $182B of excess liquidity comprised 22% of assets compared to an average of 18% for the other four UCMBs.
U.S. Banks
Exhibit 11: MS Total Credit Exposure Was Visibly Smaller Than Other UCMBs At Q2 2011
Company JPM C BAC GS MS Top 25 All US TCE % T1CC 297.8% 200.9% 245.5% 262.9% 1.0% NA NA
Amounts stated in US$ billions. Data stated as of June 30, 2011. Source: OCC Quarterly Report on Bank Trading and Derivatives Activities, Q2 2011, company data, Wells Fargo Securities, LLC
In addition to the netting of offsetting transactions, banks hold high quality collateral against derivatives exposures. In addition to the substantial reduction in credit risk to derivatives counterparties due to bilateral netting, we believe MS exposures (and the exposure of its peers) is further reduced by holding collateral against outstanding credit exposures tor educe future counterparty risk. On average across all U.S. banks surveyed by the OCC, such collateral offset 73% of the typical U.S. banks total credit exposure after the effect of bilateral netting or in the OCCs terminology, net current credit exposure. As a result, the actual credit risk taken by the typical U.S. bank in its derivatives transactions is approximately 3% of the gross notional value of the outstanding derivatives. Importantly, in our view, collateral held against exposures to higher-risk counterparties such as hedge funds tends to be materially higher than to other counterparties. In the case of MS and its peers, it appears that the bilateral netting offsets a higher percentage of the notional amount than most U.S. banks, and holding collateral against these exposures would further reduce the actual credit exposure. Collateral held against banks derivatives exposures is typically of high quality keeping loss rates usually well below 10 bps. Banks typically hold high quality collateral against outstanding derivative credit exposure. According to the OCCs report, cash collateral and Treasuries (including agencies) comprised 85% of all collateral held against derivative exposures. As a result, losses on derivatives transactions have tended to remain quite low (0.02% in Q2 2011). At their peak in Q4 2008, banks losses from derivatives transactions remain relatively low, at 0.10%. In fact, U.S. banks highest loss rate on derivatives was below 0.25% in Q3 1998 and Q4 2001 periods when we believe credit risk management of these exposures was less aggressive than today. Indeed, in both of those quarters, the netting benefit was far lower than the 91% stated in Q2 2011 (51% and 74%, respectively). Exhibit 12: Netting Benefits and Collateral Reduce Credit Exposure by 97% Vs. Notional Outstandings
N etting Benefit & Collateral Held R elative To N ominal D erivative Values - Q2 2011 N Exposure et 3%
350% Collateral % FV NC 300% 250% 200% 150% 100% 50% 0% Banks & Securities Firms 92% 2% Monoline Financials Hedge Funds 31% Sovereign Governments 35% 73%
Exhibit 13: Collateral Held Against Derivatives Positions Increases As Counterparty Risk Rises
Collateral Held by U.S. Banks Vs. Fair Value of N Current Credit - 6/30/11 et
Additional Collateral 6%
294%
Source: OCC Quarterly Report on Bank Trading and Derivatives Activities, Q2 2011, Wells Fargo Securities, LLC
Source: OCC Quarterly Report on Bank Trading and Derivatives Activities, Q2 2011, Wells Fargo Securities, LLC
Most transactions still take place in the over-the-counter (OTC) markets. The OCCs report also illustrates that approximately 95% of all derivative contracts currently outstanding in the U.S. banks have been executed in the OTC markets rather than on an exchange. In this case, MS stands out somewhat relative to its peers since all of its outstanding derivative contracts at June 30, 2011 were executed on an over-the-counter basis. Given likely netting and collateral held against these positions, we do not believe this poses a materially higher risk to MS than its peers.
Overall
Exhibit 14: About 95% Of All Derivatives Contracts Are Traded OTC
D erivatives Contracts: Exchange-T raded Vs. OT C 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
4.3% 4.3% 5.5% 4.3% 0.0% 4.6% 4.6%
7.8%
0.4%
JPM
BAC
G S
M S
T op 25
All U S
MS Other
All US
OT Contracts C
Foreign Exchange
Source: OCC Quarterly Report on Bank Trading and Derivatives Activities, Q2 2011, Wells Fargo Securities, LLC
Source: OCC Quarterly Report on Bank Trading and Derivatives Activities, Q2 2011, Wells Fargo Securities, LLC
Prime brokerage has not faced meaningful client defections despite headline risks. MS heightened headline risk relative to the other stocks in our coverage universe has not yet resulted in meaningful customer attrition in the companys prime brokerage operations, according to media report published October 1. In a story reported in the Financial Times recently, the paper noted that rival prime brokers had not seen a meaningful benefit from customers moving cash from MS, emphasizing that they believed the concerns about the banks health were overdone. The article also noted that recent market concerns about MS' specific country exposures have centered on stated gross exposures, not net credit exposures. In our view, this highlights the skittishness of investors toward companies with a reliance on wholesale funding, compared to more traditional commercial banks (where funding for core commercial banking operations is largely provided by deposits) - a lingering result of the post 2008 environment. Most prime brokerage customers have diversified their business to more than one prime broker as a result of the credit crisis of 2008. Exhibit 16: 5-Year CDS Spread: Top Six U.S. Banks Vs. 5-Year Investment-Grade Corporate CDS Index
325 300 275 250 225 200 BPS 175 150 125 100 75 50 25 0 12/30/09 12/30/10 9/30/09 3/30/10 6/30/10 9/30/10 3/30/11 6/30/11 9/30/11
BPS
Big 6
Current (9/30/11) 52 Week High: 52 Week Low: 52 Week Average: +306 bps +306 bps +107 bps +145 bps
IG Corps
+145 bps +145 bps +80 bps +97 bps
Diff
+161 bps +161 bps +27 bps +48 bps
IG Corporates
Difference
BAC
JPM
WFC
GS
MS
Average calculated as a simple average for four issuers: BAC, C, GS, JPM, MS, WFC. Source: Bloomberg, Wells Fargo Securities, LLC
Valuation
We prefer JPM and PNC for defense and GS as a cyclical play in the UCMBs. Given the heightened anxiety of bank investors through September, we still prefer defensive names across our coverage universe. In our view, these would include names that offer: 1) high quality balance sheet including high capital levels and solid liquidity, 2) proven ability to offer above-average dividends and share repurchases over the next 12
U.S. Banks
months compared to its peers, and 3) relatively below-average price/tangible book multiples. We believe investors have a similar shopping list, and will continue to prefer large-cap regional banks (LCRB) stocks in favor or more volatile universal/capital markets banks (UCMB) stocks. As a result, we are reaffirming our preference for JPM and GS within the UCMB space and PNC within our LCRBs. While MS certainly trades at a low multiple of tangible book value MS ended trading on September 30 at 0.5x our estimated FYE 2012 TBV vs. a peer group average of 0.8 - MS' volatility (particularly on an intra-day basis) remains our primary concern in the near-term. Exhibit 18: Recent Share Price Performance: Wells Fargo Securities U.S. Large Cap Banks Coverage Universe (through September 30, 2011)
9/30/2011 Ticker STI KEY FITB BBT CMA PNC USB FHN Rating VR-Low 2V 2V 2 2 2 1 2 2 $ $ $ $ $ $ $ $ 17.00 5.50 10.50 22.00 23.00 60.00 25.00 6.00 VR-High $ $ $ $ $ $ $ $ 20.00 7.00 11.50 24.00 25.00 64.00 27.00 7.00 Price Mkt Cap ($B) $17.95 $5.93 $10.10 $21.33 $22.97 $48.19 $23.54 $5.96 $9,637 $5,650 $9,290 $14,868 $4,616 $25,360 $45,219 $1,572 1 Day -4.1% -4.8% -3.4% -3.4% -4.1% -3.2% -2.8% -6.0% -3.3% $ $ $ $ 30.00 45.00 16.00 7.00 $ $ $ $ 32.00 48.00 19.00 8.50 $25.62 $30.12 $94.55 $13.51 $6.12 $74,743 $117,439 $48,952 $26,046 $62,023 -4.8% -4.0% -5.3% -10.5% -3.6% -4.8% -4.4% 1,131 35.34 10,913 2,415 -2.5% -3.8% -2.2% -2.6% 5 Day 5.8% 3.9% 2.6% 2.3% 2.1% 1.9% 1.4% -2.0% 2.2% 2.5% 1.8% -0.7% -1.5% -3.0% 0.4% 0.9% -0.4% 1.0% 1.3% -2.7% % Change in Share Price 1 Month -9.8% -10.7% -4.9% -4.3% -10.2% -3.9% 1.4% -15.3% -3.2% -17.5% -19.8% -18.6% -22.8% -25.1% -20.3% -15.9% -7.2% -11.5% -6.0% -6.4% 3 Month -30.4% -28.8% -20.8% -20.5% -33.6% -19.2% -7.7% -37.5% -17.2% -38.5% -26.4% -29.0% -41.3% -44.2% -34.1% -29.7% -14.3% -26.9% -12.1% -12.9% 6 Month -37.8% -33.2% -27.3% -22.3% -37.4% -23.5% -10.9% -46.8% -21.3% -42.0% -34.7% -40.4% -50.5% -54.1% -42.1% -36.7% -14.7% -31.9% -11.4% -13.1% 1 Year -30.5% -25.5% -16.0% -11.4% -38.2% -7.2% 8.9% -46.8% -6.8% -34.5% -20.9% -34.6% -45.3% -53.3% -34.0% -26.9% -0.9% -23.5% 1.2% 2.0% QTD -30.4% -28.8% -20.8% -20.5% -33.6% -19.2% -7.7% -37.5% -17.2% -38.5% -26.4% -29.0% -41.3% -44.2% -34.1% -29.7% -14.3% -26.9% -12.1% -12.9% YTD -39.2% -33.0% -31.2% -18.9% -45.6% -20.6% -12.7% -49.4% -21.7% -45.8% -29.0% -43.8% -50.3% -54.1% -41.4% -36.3% -10.0% -32.3% -5.7% -9.0% P/TBV 2012E 0.65x 0.61x 0.84x 1.25x 0.68x 0.98x 1.87x 0.64x 1.28x 0.50x 0.88x 0.72x 0.46x 0.43x 0.65x 0.82x Price/EPS 2011E EPS 16.30x 7.42x 9.27x 11.84x 11.46x 7.53x 9.99x 10.52x 10.10x 6.74x 5.85x 17.36x 16.79x NM 9.28x 9.52x N-EPS 6.52x 8.34x 8.75x 7.98x 7.93x 7.13x 8.47x 9.32x 7.96x 4.66x 4.78x 5.24x 4.97x 3.12x 4.52x 5.42x
$ 140.00
$ 150.00
UCMBs Wtd. Avg. Total Coverage group Wtd. Average S&P 500 KBW Index DJIA NASDAQ
Last price and return calculations reflect closing prices and period returns as of September 30, 2011. Price/TBV ratio reflects share price as of close of trading on September 30, 2011 relative to estimated TBV at FYE 2012. Sorted by 5 Day share price performance. Averages stated on a market capitalization-weighted basis. 1= Outperform, 2= Market Perform, 3= Underperform, V= Volatile Source: Factset, Wells Fargo Securities LLC estimate
Required Disclosures
Bank of America Corporation (BAC) 3-yr. Price Performance
$42.00 $40.00 $38.00 $36.00 $34.00 $32.00 $30.00 $28.00 $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 7/8/09 6/9/10 7/7/10 7/6/11 8/5/09 6/8/11 10/1/08 6/10/09 2/17/10 2/18/09 3/18/09 3/17/10 4/14/10 2/16/11 3/16/11 5/11/11 8/3/11 9/2/09 11/26/08 12/24/08 10/28/09 11/25/09 10/27/10 11/24/10 10/29/08 12/23/09 12/22/10 9/28/11 1/21/09 9/30/09 1/20/10 5/12/10 9/29/10 4/13/11 4/15/09 5/13/09 1/19/11 8/31/11 8/4/10 9/1/10
Security Price
Date
Date 4/13/2009 4/13/2009 5/8/2009 6/17/2009 10/7/2009 1/11/2010 7/19/2010 4/18/2011 6/30/2011 7/20/2011 8/5/2011 8/22/2011 Publication Price ($) 11.02 13.51 12.73 17.00 16.78 13.98 12.82 11.14 9.57 8.83 6.97 Rating Code Burnell 3 2 2 1 1 1 1 1 1 2 2 Val. Rng. Low 7.00 12.00 14.00 24.00 23.00 17.00 16.00 15.00 14.00 9.50 7.00 Val. Rng. High 8.00 14.00 16.00 27.00 26.00 19.00 18.00 17.00 15.00 11.50 8.50 Close Price ($) 11.02 14.17 12.30 17.35 16.93 13.61 12.42 10.96 9.85 8.17 6.42
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell SR NR NE Suspended Not Rated No Estimate
U.S. Banks
Security Price
$50.00 $40.00 $30.00 $20.00 $10.00 $0.00 10/1/08 10/29/08 11/26/08 12/24/08 1/21/09 2/18/09 3/18/09 4/15/09 5/13/09 6/10/09 7/8/09 8/5/09 9/2/09 9/30/09 10/28/09 11/25/09 12/23/09 1/20/10 2/17/10 3/17/10 4/14/10 5/12/10 6/9/10 7/7/10 8/4/10 9/1/10 9/29/10 10/27/10 11/24/10 12/22/10 1/19/11 2/16/11 3/16/11 4/13/11 5/11/11 6/8/11 7/6/11 8/3/11 8/31/11 9/28/11
Date
Date 9/16/2011 9/16/2011 Publication Price ($) 28.59 Rating Code Burnell 2 Val. Rng. Low 30.00 Val. Rng. High 32.00 Close Price ($) 28.99
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell SR NR NE Suspended Not Rated No Estimate
10
Security Price
$30.00 $28.00 $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 7/8/09 8/5/09 6/8/11 10/1/08 6/10/09 2/17/10 5/12/10 3/18/09 3/17/10 4/14/10 2/16/11 3/16/11 4/13/11 2/18/09 5/11/11 8/3/11 6/9/10 7/7/10 7/6/11 9/2/09 10/28/09 10/29/08 12/23/09 12/22/10 11/26/08 12/24/08 11/25/09 10/27/10 11/24/10 9/28/11 1/21/09 9/30/09 1/20/10 9/29/10 5/13/09 1/19/11 4/15/09 8/31/11 8/4/10 9/1/10
Date
Date 4/13/2009 4/13/2009 4/17/2009 6/17/2009 8/14/2009 10/15/2009 1/11/2010 7/16/2010 1/18/2011 8/22/2011 Publication Price ($) 33.70 33.24 33.50 42.90 47.16 44.68 40.46 44.91 34.35 Rating Code Burnell 2 2 2 2 2 2 1 1 1 Val. Rng. Low 29.00 31.00 35.00 42.00 48.00 48.00 48.00 51.00 45.00 Val. Rng. High 31.00 34.00 39.00 46.00 50.00 51.00 51.00 54.00 48.00 Close Price ($) 33.70 33.26 32.73 42.45 47.16 44.53 39.00 44.75 33.41
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell SR NR NE Suspended Not Rated No Estimate
11
U.S. Banks
Security Price
$20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 7/9/09 6/9/11 7/8/10 8/5/10 7/7/11 9/3/09 8/6/09 8/4/11 2/19/09 3/19/09 10/1/09 10/2/08 3/18/10 4/15/10 3/17/11 1/22/09 6/11/09 2/18/10 5/13/10 6/10/10 9/30/10 2/17/11 9/1/11 4/14/11 11/27/08 12/25/08 11/26/09 11/25/10 12/23/10 10/30/08 10/29/09 12/24/09 10/28/10 5/12/11 4/16/09 5/14/09 1/21/10 1/20/11 9/29/11 9/2/10
Date
Date 10/2/2008 10/2/2008 10/13/2008 2/2/2009 2/2/2009 4/13/2009 4/13/2009 6/17/2009 10/22/2009 1/21/2010 7/22/2010 10/21/2010 8/22/2011 Publication Price ($) NA 18.10 20.80 26.89 28.10 34.08 30.63 26.80 25.38 16.00 Rating Code Sipkin 1 1 Hausner SR Burnell 2 2 2 2 2 2 2 Val. Rng. Low 40.00 27.00 NE 22.00 30.00 34.00 32.00 30.00 27.00 16.00 Val. Rng. High 43.00 31.00 NE 25.00 32.00 37.00 35.00 33.00 30.00 19.00 Close Price ($) 23.21 18.10 20.80 26.89 27.48 35.74 29.34 26.79 24.60 15.67
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell SR NR NE Suspended Not Rated No Estimate
12
Security Price
$116.00 $106.00 $96.00 $86.00 $76.00 $66.00 $56.00 $46.00 6/8/11 7/6/11 9/2/09 6/9/10 7/7/10 8/4/10 7/8/09 9/1/10 10/1/08 3/18/09 6/10/09 9/30/09 1/20/10 2/17/10 4/14/10 5/12/10 3/16/11 8/3/11 11/26/08 10/28/09 11/25/09 12/22/10 12/24/08 12/23/09 10/29/08 10/27/10 11/24/10 9/28/11 2/18/09 5/13/09 3/17/10 2/16/11 1/19/11 4/13/11 5/11/11 1/21/09 4/15/09 9/29/10 8/31/11 8/5/09
Date
Date 10/1/2008 10/1/2008 12/16/2008 2/2/2009 2/2/2009 4/13/2009 4/13/2009 6/17/2009 10/7/2009 1/11/2010 5/3/2010 4/19/2011 8/22/2011 Publication Price ($) NA 76.00 83.57 130.15 144.16 186.98 174.31 145.20 151.86 111.76 Rating Code Sipkin 1 1 Hausner SR Burnell 1 1 1 1 1 1 1 Val. Rng. Low 155.00 95.00 NE 138.00 169.00 209.00 205.00 180.00 170.00 140.00 Val. Rng. High 160.00 100.00 NE 141.00 179.00 220.00 215.00 190.00 180.00 150.00 Close Price ($) 134.50 76.00 83.57 130.15 139.73 190.48 171.56 149.50 151.86 106.51
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell SR NR NE Suspended Not Rated No Estimate
13
U.S. Banks
Wells Fargo Securities, LLC maintains a market in the common stock of Bank of America Corporation, Citigroup Inc., JPMorgan Chase & Co. Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Citigroup Inc., The Goldman Sachs Group, Inc. within the past 12 months. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Citigroup Inc., JPMorgan Chase & Co., The Goldman Sachs Group, Inc. Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Citigroup Inc., The Goldman Sachs Group, Inc. in the past 12 months. Citigroup Inc., The Goldman Sachs Group, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Citigroup Inc., The Goldman Sachs Group, Inc. Bank of America Corporation, The Goldman Sachs Group, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-related services to Bank of America Corporation, The Goldman Sachs Group, Inc. Bank of America Corporation, The Goldman Sachs Group, Inc. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided nonsecurities services to Bank of America Corporation, The Goldman Sachs Group, Inc. Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Bank of America Corporation, The Goldman Sachs Group, Inc. in the past 12 months. Wells Fargo Securities, LLC or its affiliates may have a significant financial interest in Bank of America Corporation, Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, The Goldman Sachs Group, Inc. A research analyst contributing to this report has received compensation from the subject company in the past 12 months. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from an affiliate of Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, The Goldman Sachs Group, Inc. Wells Fargo Securities, LLC or its affiliates managed or co-managed a public offering of securities for an affiliate of Citigroup Inc. within the past 12 months. Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from an affiliate of Citigroup Inc. in the past 12 months. BAC: Risks to our recommendation include: 1) a stronger or weaker economic backdrop than expected, with a resulting effect on home prices and consumer sentiment; 2) a more or less constructive settlement of pending regulatory and/or political challenges than expected; and 3) issuance of common shares in an amount that allows BAC to substantially meet its regulatory capital requirements in line with other universal/capital markets bank peers. C: Risks to our valuation range include slower global economic growth, higher credit costs, and greater regulatory burden than expected. GS: Risks to achieving our valuation range include trading losses, more stringent government regulation, growing legal risks, employee defections, and the extension of a challenged economic environment. JPM: Risks to achieving our valuation range include unexpectedly higher credit costs, increased regulation, employee defections, and the extension of a challenged economic environment. MS: Risks to achieving our valuation range include trading losses, onerous interpretations of government regulations, employee defections, and the extension of a challenged economic environment. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.
STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.
14
As of: October 3, 2011 51% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform. 47% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform. 3% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform. Wells Fargo Securities, LLC has provided investment banking services for 42% of its Equity Research Outperform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 36% of its Equity Research Market Perform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 24% of its Equity Research Underperform-rated companies.
15
U.S. Banks
16