Download Solid Capital Market Revenues Lifted US Large Banks

Industry Report Card:
Solid Capital Market Revenues Lifted
U.S. Large Banks' First-Quarter
Earnings Despite Muted Loan Growth
Primary Credit Analyst:
Stuart Plesser, New York (1) 212-438-6870; [email protected]
Secondary Contacts:
Brendan Browne, CFA, New York (1) 212-438-7399; [email protected]
Devi Aurora, New York (1) 212-438-3055; [email protected]
Research Contributor:
Prateek Nanda, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Table Of Contents
Industry Ratings Outlook
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Industry Report Card:
Solid Capital Market Revenues Lifted U.S. Large
Banks' First-Quarter Earnings Despite Muted Loan
Growth
Industry Ratings Outlook
The eight U.S. global systematically important banks (G-SIBs) posted solid first-quarter earnings. Earnings were fueled
by higher capital market revenues and spread income, and lower credit provisions and taxes, which more than offset
higher expenses. Unfavorable capital market conditions in the year-ago quarter enabled easy comparisons. Overall
first-quarter operating performance was largely in line with S&P Global Ratings' expectations.
The eight G-SIBs are Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group
Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., and Wells Fargo & Co. (We also include a review of
the earnings of Northern Trust Corp., which is a peer of the trust banks--Bank of New York Mellon and State Street).
Buoyant capital markets activity fueled noninterest income, which could continue in 2017
Revenue benefitted from higher capital market activity amid continued momentum following the U.S. elections.
Notably, fixed income, currencies, and commodities (FICC) (up 24% year over year) and underwriting (up 62% year
over year) posted a strong performance, whereas equity trading ended flat and advisory fees slipped marginally. Within
FICC:
• Credit, securitized products, and mortgage benefited from spread tightening;
• Rates improved due to increased activity, particularly ahead of the European elections and the market's response to
central bank actions such as a stronger U.S. rate outlook;
• Commodities performance was mixed; and
• Currencies declined amid reduced volatility.
All banks (except Goldman Sachs) posted a significant jump in FICC revenues. Morgan Stanley reported the sharpest
increase in FICC revenues (nearly doubled to $1.7 billion) led by strong performances across most products. Positively,
management is targeting FICC revenues in excess of $1 billion per quarter, even as it has been able to reduce capital
allocated to that business. Meanwhile, Goldman attributed the underperformance to substantially lower revenues in
commodities and currencies amid low volatility that reduced activity levels of its clients.
Compared to its peers, Goldman is a much larger player in commodities, and the weakness of this revenue stream
coupled with its client mix (higher reliance on hedge funds that were less active versus the corporate client base of its
large bank peers') led to the underperformance. Within equities for the group, corporate derivatives performance
improved, but cash products were mixed amid weaker volumes. Although equity trading revenue was flat year over
year, both Citigroup (up 10%) and Bank of America (up 7%) outperformed, mainly reflecting these banks' efforts to
grow equity trading through investments in platforms and talent.
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Underwriting activity, in general, was supported by continued investor optimism and stable capital market activity
compared to the previous year. Equity underwriting revenues nearly doubled as low volatility propelled the new issue
market whereas debt underwriting (up 51%) benefitted from strong leveraged finance and investment-grade activity
stemming from tighter credit spreads. Advisory revenues fell 5% year over year because of market uncertainty
regarding the new Administration's economic initiatives and a strong quarter last year; however, Bank of America
posted a sharp increase due largely to an increase in completed mergers and acquisitions (M&A).
Overall noninterest income for all banks (except Wells Fargo, for which the previous year included a gain on sale of
crop insurance business and gains related to hedge ineffectiveness versus a loss this year) rose year over year due
largely to the strength in capital market revenues. Additionally, wealth and investment management units of these
banks aided the top lines as higher market valuations lifted the asset management fees.
Still, lower mortgage banking (reduced refinance activity due to higher long-term rates and seasonally lower purchase
volumes) and credit card fees (reflecting the industrywide trend of increasing reward costs and seasonality) weighed
on noninterest income. During the quarter, Citigroup announced that it is exiting the mortgage servicing business so as
to increase its focus on mortgage originations and improve returns. The company recorded a $400 million charge
related to this sale, which was more than offset by a $750 million gain on asset sales, about half of which related to the
sale of its consumer businesses in Canada and Argentina.
Looking ahead, we estimate capital market revenues will increase in 2017, underpinned by a more supportive
operating environment stemming from expectations for a strengthening U.S. economy. Debt markets are set to remain
solid and there is potential for a continued pickup in equity underwriting and advisory fees over the course of the year
if market valuations remain strong. Other potential factors, such as divergent global monetary policies, could also spur
activity. That said, capital market revenue is hard to predict, and numerous factors, including geopolitical events such
as the German and Italian elections, negotiations pertaining to the terms of U.K.'s withdrawal from the European
Union, and uncertainty regarding potential tax reform in the U.S. could create uncertainty and impact sentiment (see
"Global Investment Banks' Revenues Rise Amid Talk Of Regulatory Relief," published April 12, 2017). Further, there is
growing uncertainty about the Trump Administration's ability to boost the economy through various proposals.
Beyond capital markets, other noninterest income sources may also get a boost if economic growth accelerates.
Asset/wealth management could benefit from higher equity market valuations (banks with assets under management
[AUM] skewed toward fixed-income assets will likely see a decline in value as rates rise). Credit card spending should
also get a lift from higher consumer confidence. In contrast, we expect mortgage banking revenue to face some
headwinds as higher rates could weigh further on origination volumes. According to the Mortgage Bankers Assn.
(MBA), mortgage originations in the first quarter fell by about 23% from the fourth quarter. Refinance volumes were
down 37% because of an increase in the 30-year mortgage rate. The MBA expects the refinance volume to decrease to
$496 billion in 2017 from $901 billion in 2016, but it expects refinancing volume will be partially compensated by rising
purchase volumes.
Net interest income should benefit from higher rates in 2017
Net interest income increased from the fourth quarter because of higher net interest margins (NIM) and, to a lesser
extent, loan growth. NIM expanded six basis points (bps) quarter over quarter, on average, due largely to higher yields
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on loans and securities portfolios following the Federal Reserve's (Fed) rate hike in December. Bank management
teams noted that they have not yet significantly raised deposit pricing, despite the 75-bps rise in the Fed's target rates,
although they expect deposit costs to rise more meaningfully with additional rate hikes. We note that the yield on
interest-bearing liabilities increased six bps quarter over quarter (deposit yields up just three bps), lagging the 12 bps
increase in earnings asset yields (loan yields were up 13 bps, and securities yields up 16 bps).
NIM trends varied by bank. For example, NIM increased significantly for both Bank of America and JPMorgan. For
Wells Fargo, NIM was unchanged as the benefit of higher rates was offset by lower income from trading assets and
mortgages held for sale, and higher deposit and debt balances. Citigroup's NIM declined because of continued
wind-down of legacy assets and lower trading-related net interest income.
All banks were asset sensitive as of the end of first-quarter 2017, implying that the yield they earn on their assets would
increase more than the cost of their liabilities if market interest rates rose. We expect higher rates to result in increased
net interest income. However, we believe that the improvement in net interest income and NIMs could be less than
some banks expect. That's largely because the cost of banks' deposits could rise faster than what the banks forecast for
a variety of reasons. For instance, when the Fed raises rates, more non-interest-bearing deposits could exit the banking
system or shift to interest-bearing accounts than banks expect (see "Higher Rates May Not Help U.S. Banks As Much
As They Expect," published Nov. 29, 2016).
Continued focus on expense management should aid banks' bottom lines in 2017
The G-SIBs as a group posted positive operating leverage by maintaining strong expense discipline, although trends
differed across banks. Notably, Bank of America and Citigroup posted positive operating leverage of 700 bps and 300
bps, respectively, whereas Wells Fargo and JPMorgan posted negative operating leverage. Higher expenses at JPM
were due largely to increased legal expenses in asset management, higher compensation, and auto lease depreciation.
For Wells Fargo, the efficiency ratio weakened to 62.7% (versus 58.7% in the year-ago quarter), outside its targeted
range of 55%-59%, as expenses rose due to increased compensation, a mix of higher cost employees in
non-revenue-generating areas, and higher outside professional services costs. Management noted that outside
professional services costs are likely to remain elevated as the company continues to focus on regulatory and
compliance initiatives, including the sales practices issue and resolution planning.
Most banks noted they will continue to improve their efficiency ratios in 2017 through digitalization, process
automation, and reduction in branch count. For example, Bank of America's expense management efforts included
simplifying the overall organization, lowering headcount, optimizing its real estate footprint, and consolidating its data
centers. Goldman's ratio of compensation to revenue was 41%, 100 bps lower than the year-ago quarter. Management
noted that first-quarter accrual was the lowest in its history and attributed the reduction to completion of a $900
million expense initiative in 2016. Wells Fargo is targeting a $2 billion reduction in expense by 2018, and it plans to use
the savings to fund business investments, thereby remaining neutral to overall earnings.
Although difficult to predict, legal expenses for 2017 should not be a major factor because we aren't aware of any
imminent industry settlements that would meaningfully hurt bank bottom lines. Despite the new Administration's
initiatives to reduce regulation, we believe it is too early to determine the exact shape in regulatory changes for the
U.S. banking sector. As such, we believe regulatory expenses will likely remain at current elevated levels. Further,
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investments in technology to improve digital footprints and protect cybersecurity should also continue to rise through
2017.
Lastly, banks' tax rates were lower in the first quarter as a result of a tax related to a new accounting standard for
share-based compensation. Going forward in certain quarters, when a bank's stock price improves, the effect will be to
lower the tax rate, while a declining stock price will have the opposite effect. The accounting change distorts return on
equity (ROE) calculations and overstated them in the first quarter. For example, the tax benefit added 250 bps to
Goldman Sachs' ROE.
Reserve releases aided earnings, but asset quality metrics will likely worsen
For all G-SIBs, nonperforming assets decreased from the fourth quarter, mainly reflecting improvements across
consumer and commercial loan portfolios. Credit quality within commercial loans improved as energy portfolios
continued to stabilize, due largely to receptive capital markets. For example, energy loans for Wells Fargo declined $2
billion from the fourth quarter as borrowers paid down the loans using the proceeds raised in the capital markets. Bank
of America's criticized exposure fell, mainly due to improvements in their energy portfolio.
Although credit quality within consumer loans remains healthy, loss rates have been migrating higher. The increase in
loss rates was due largely to higher losses in credit cards (reflecting seasoning and mix shift) and auto loans (weaker
used vehicle values). Card losses inched up for all banks. Wells Fargo's rose 45 bps to 3.54% based on higher losses
from other channels of origination; Citigroup was up 40 bps to 3.1% because of flow-through of delinquencies to credit
losses related to the Costco conversion; JPMorgan was up 27 bps to 2.94% based on seasonality and mix shift; and
Bank of America was up 22 bps to 2.74% based on seasonality.
The G-SIBs as a group released reserves (net charge-offs exceeded credit provisions) for the second quarter in a row
after building reserves through four quarters ending September 2016. The reserve releases largely reflected improved
performance of their energy portfolios.
We will monitor potential asset quality deterioration particularly in the following assets classes: credit cards,
automobile loans (particularly to nonprime borrowers), commercial real estate (CRE), and leveraged loans. Although
early-stage delinquencies for all these asset classes are still relatively benign, they've been ticking up (particularly
within credit card and auto loan portfolios), and we expect net charge-offs to move higher from historically low levels.
Further, we expect rising interest rates will put the greatest pressure on floating-rate loans such as CRE--and on banks'
weak marginal borrowers in other asset classes, which were able to borrow at low rates, thus constraining monthly
payment amounts.
The Fed's recently released April 2017 Senior Loan Officer Survey suggests that banks tightened lending standards on
CRE (particularly construction and development, and multifamily) and automobile loans, whereas standards on credit
cards were eased. Lending standards on commercial and industrial (C&I) loans were unchanged.
We are closely monitoring other critical indicators that may presage asset quality problems, including the impact of
potentially lower used-car prices and maturity expansions of auto loans, as well as rent and occupancy levels for CRE.
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Loan growth slowed in the first quarter and should follow the trajectory of U.S. economic growth in
2017
On a quarter-over-quarter basis, loans were little changed for the second quarter in a row. Bank management teams
noted that corporate borrowers have been tapping capital markets for their financing needs as opposed to relying on
bank loans, which weighed on the overall loan growth. There is also the issue of continued purposeful runoff of
noncore portfolios.
For the G-SIBs in aggregate, a decline in consumer loan balances offset the increase in commercial loans. Commercial
loan growth trends varied across banks. Compared to the fourth quarter, C&I loan growth was flat at JPMorgan and
declined at Wells Fargo. This was in line with the industry trend; according to the H.8 report released by Fed, C&I
loans for U.S. banks shrank by 1% in the first quarter. However, C&I loans at Bank of America rose about 2%,
outpacing the industry growth rate. For Citigroup, commercial loan balances were up 3%, mainly reflecting higher
loans in Europe, the Middle East, and Africa; Latin America; and Asia, but they were unchanged in North America. On
the other hand, consumer loan balances fell because of a decline in mortgage lending, lower card balances reflecting
seasonality, and runoff of legacy noncore loans.
We expect the U.S. banking industry to experience overall loan growth in the mid-single digits in 2017. Loan growth
should be broad-based, although C&I loans could be a leading source of this growth depending on the trajectory of the
U.S. economy. Growth in consumer disposable income should help push card balances higher. CRE growth should
moderate somewhat because of banks' more conservative risk posture toward this loan category. We expect higher
rates to weigh on residential mortgage originations. Auto loans, which have grown robustly for several years, could
show less growth if banks become more cautious. In fact, banks like Wells Fargo already have indicated they are
taking a more cautious approach to auto lending.
Capital and liquidity remain strong
The G-SIBs as a group indicated stronger capitalization quarter over quarter, with the average estimated fully
phased-in Basel III common equity Tier 1 ratio (CET1) rising by about 30 bps to 12.8%. All banks already exceed their
expected fully phased-in 2019 required minimums (including the Fed G-SIB surcharges). The improvements in the
CET1 ratio varied across banks as follows:
• Wells Fargo: up 40 bps on lower risk-weighted assets (RWA) stemming from credit discipline and loan growth
trends
• JPMorgan: up 20 bps on capital generation, partly offset by repurchases
• Bank of America: up 20 bps driven by earnings, utilization of deferred tax assets and lower RWAs due to reduced
exposure in Global Markets, lower credit card exposure, and legacy asset runoff.
• Citigroup: up 26 bps on earnings, partly offset by repurchases
• Goldman Sachs: down 20 bps on increased credit RWAs driven by lending
• Morgan Stanley: up 70 bps on lower operational RWAs
One area that banks have been urging regulators to assess relates to the measurement of operational risk, which has
grown to be a disproportionate amount of RWA. Consequently, a section of the bill introduced by Rep. Jeb Hensarling
(R-Texas) attempts to address the operational risk for banks. We note that three G-SIBs (Bank of America, JPMorgan,
and Citigroup) have more than $1 trillion in operational RWAs, implying significant potential to free up capital. The bill
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passed in the House, but it is unclear if the bill will be approved in the Senate.
All banks recently submitted their capital plans as part of the 2017 CCAR. The Fed's approvals of the capital plans
would be applicable for the next four quarters ending June 2018. Given the banks' comfortable position against the
minimums and improved earnings, we expect most banks to increase their requests for capital returns to shareholders.
We note that the 2017 CCAR will also include the supplementary leverage ratio (SLR)--with a minimum requirement of
3%--under the severely adverse scenario. In our view, the SLR will act as a capital hurdle and could require some
banks, particularly the trust banks (which have lower SLR ratios), to be more circumspect regarding asset growth and
possibly issue additional Tier 1 capital.
Separately, it is unclear if regulators will modify the calculation of the denominator of the SLR to exclude central bank
reserves. In our view, this approach (adopted by Bank of England in August 2016) could provide relief to trust banks
because such reserves comprise a significant portion of these banks' balance sheets. It is also unclear if the Fed will
implement the stress capital buffer (SCB) as proposed in 2018 stress tests. The SCB would replace the existing 2.5%
capital conservation buffer as a component in each CCAR firm's point-in-time capital requirements and would set the
requirement at an amount equal to the maximum drop in a firm's CET1 capital ratio under the severely adverse
scenario. Another area of regulatory change that has been discussed by proponents of regulatory change relates to
possibly phasing out the qualitative component of the annual CCAR assessment for G-SIBs and the frequency of the
stress test. We are uncertain if any such changes will be made as part of revised regulation.
All of the U.S. systemically important banks (including the trust banks) to which the SLR applies are already in
compliance with the final threshold of 5% at the holding company level and the bank-level requirement of 6%.
We believe strong deposit inflows, which partially reflect low interest rates, have abetted funding ratios. For example,
we estimate that deposits in the U.S. banking system have grown roughly 60% since 2006, while loans have risen only
approximately 28%. Should rates move higher, though, some deposits may exit the banking system, which could put
pressure on some banks' funding or perhaps pose a headwind to loan growth.
We expect liquidity to remain adequate through 2017. One way we measure liquidity is by assessing how much a
bank's broad liquid assets exceed its short-term wholesale funding (as we define the terms). Liquidity coverage is about
2x for money-center banks and broker-dealers, which rely heavily on short-term funding, and coverage is higher for
trust banks. In terms of liquidity regulatory ratios, most banks' liquidity coverage ratios (LCR) are already above their
fully phased-in requirement of 100%.
In March, the Fed announced that it did not object to a resubmitted capital plan from Morgan Stanley, as a result of
progress made by the firm in addressing deficiencies identified in its 2016 CCAR.
In addition, the FDIC and the Fed announced that Wells Fargo had adequately remediated the deficiencies in its 2015
resolution plan. As a result, the firm will no longer be subject to growth restrictions imposed last year by regulators.
Separately, although Wells Fargo's overall earnings generation was good and its capital ratios and asset quality
continued to be solid in the first quarter, we remain watchful of the ongoing ramifications of its retail bank sales
practice issues, such as customer trends, regulatory matters, and legal issues. These issues are among those we
consider in our negative outlook on Wells Fargo. The company's March retail banking customer activity report
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continued to show lower year-over-year checking account openings likely because of transitions in branch sales
incentives as well as possible lower customer loyalty because of the negative publicity; however, importantly,
consumer and small business deposits continue to grow.
We also consider that regulatory risk remains heightened for Wells Fargo. For example, in March, the Office of the
Comptroller of the Currency downgraded the company's Community Reinvestment Act (CRA) rating, which imposes
limitations on certain nonbank activities and could affect the company's relationships with certain public-sector
entities. Currently, we do not believe the CRA development will significantly affect the company's diversified revenue
base or balance sheet. Regarding legal matters, the company said the high end of the range of reasonably possible
potential litigation losses in excess of the company's liability for probable and estimable losses was approximately $2.0
billion as of March 31, 2017. We assume Wells Fargo would curtail share repurchases to fund any substantial legal or
regulatory charges.
Wells Fargo also had a contentious shareholders' vote in regard to board members. All board members were reelected,
but some were reelected by small margins. We currently assume that Wells Fargo's current long-tenured top managers
will remain in place, although there could be negative ratings implications if further management turnover occurs and
it increases strategic uncertainties.
Higher markets boost trust banks' earnings
The large U.S. trust banks--Bank of New York Mellon (BK), State Street Corp. (STT), and Northern Trust Corp.
(NTRS)--posted good operating earnings in first-quarter 2017 (on an adjusted basis, excluding one-time items). We
estimate that the pretax operating margin for the trust banks, as a group, was about 29.5% (versus 28% a year ago).
Revenues for the group were up 6% year over year, primarily reflecting higher servicing and investment management
fees, and increased net interest income, partly offset by a decline in foreign exchange trading revenues.
Servicing fees rose because of higher equity markets and new business (for BK, growth in collateral solutions, higher
money market and mutual fund fees within its clearing business, and higher fees in depositary receipts also aided the
overall servicing fees). The increase in management fees reflected strong equity markets and lower money market fee
waivers.
However, continued strength in U.S. dollar weighed on both servicing and management fees. Net interest income
increased for all trust banks as NIMs expanded due to higher short-term rates. However, lower yields on foreign
investment portfolio, lower earning assets, higher foreign exchange swap costs for STT, and interest rate hedging,
lower earning assets, and higher debt balances for BK weighed on net interest income. Lower currency volatility
affected the foreign exchange trading revenues for all banks (except STT, which saw an increase due to higher
volumes).
Expense management continues to be a top priority for all the trust banks. All banks generated positive year-over-year
operating leverage (more than 200 bps for BK and STT, about 20 bps for NTRS). Notably, year-over-year expenses
were little changed for BK, mainly reflecting the benefits from its business improvement process initiative. Similarly,
STT's Beacon initiative contributed to good expense control as expenses rose 6% (about 3% related to the addition of
GEAM). However, expenses rose 8% at NTRS due largely to higher performance-based compensation and staff growth
in low-cost locations.
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The AUM of all trust banks, as a group, was up 9% year over year because of higher market valuations, partly offset by
the stronger U.S. dollar. Regarding flows, STT saw strong inflows in exchange-traded funds, with the addition of
GEAM, partly offset by low margin institutional outflows in passive strategies. For BK, inflows in active strategies and
cash products were partly offset by outflows in index products.
On a year-over-year basis, assets under custody and administration (AUCA) improved for all the trust banks, mainly
reflecting higher equity markets and new business, partly offset by the stronger U.S. dollar. STT noted that its AUCA
benefitted from strong growth in Europe (up 16%) followed by the U.S. (up 9%). New business wins totaled $109 billion
for BK and $110 billion for STT.
Lastly, the estimated CET1 ratios on a fully phased-in basis for all trust banks were above the required minimums. BK's
CET1 ratio rose 30 bps from the fourth-quarter to 10%, mainly reflecting earnings retention. SLR improved to 5.9% at
the parent (up 30 bps) and 6.6% at the bank (up 50 bps) due to retained earnings and smaller average balance sheet.
STT's CET1 ratio was unchanged at 10.9% as higher retained earnings offset shareholder payouts and increased
RWAs. The SLR at the parent company was 6.0%, and at the bank was 6.5%. Both ratios improved 40 bps from the
fourth quarter as STT proactively managed excess deposits, which helped reduce the balance sheet.
Separately, NTRS' capital plan submissions will not be subject to objection by the Fed on qualitative grounds in the
2017 CCAR cycle as a result of changes to the capital plan rule. However, NTRS would be subject to a targeted
horizontal review of specific areas of capital planning, which will begin in the third quarter of 2017. Further, the Fed
and the FDIC determined the 2015 resolution plan of NTRS credible. However, the agencies identified three
shortcomings in NTRS's resolution plan, which must be addressed in the 2017 plan due Dec. 31, 2017. The
shortcomings related to resolution liquidity, transfer of foreign deposits to a bridge bank, and shared services.
Other expectations for 2017
In regard to regulation, President Donald Trump recently signed an executive order that signaled his Administration's
intent to consider changes to financial regulation affecting banks. While much will depend on the concrete details that
emerge, our early read is that some of these changes (if passed) could bode well for bank profitability and shareholder
payouts. However, they could also be detrimental for bank creditors, depending upon how bank management teams
react to a potential easing of regulatory requirements. This in turn, could lead to further differentiation of ratings
among U.S. banks.
We focus on three areas of possible changes in ratings as a result of regulatory changes: our Banking Industry Country
Risk Assessment, capital analysis, and the uplift we include in our ratings based on additional loss-absorbing capacity
(see also "What Financial Regulations May Be Affected By The Trump Administration, And How They Can Affect
Ratings," published March 20, 2017). Management reactions aside, in our opinion, a regulatory overhaul of the
Dodd-Frank Act could be viewed negatively for creditors if it eliminates or weakens requirements for capital, liquidity,
and resolution planning among the largest banks, particularly if banks generally respond by sharply increasing their
risk appetite. That said, we acknowledge that prudent regulatory relief within limits could spur further economic
growth, as banks may be more willing to increase loan growth and balance sheet size.
We also note that there has been a resurgence of initiatives by some legislators pertaining to a 21st Century version of
the Glass Steagall Act that would in some manner separate traditional banking activity, such as lending, from more
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risky activities, such as trading. It is unclear at present if such initiatives will take shape and if so, in what form. We
would view such an initiative as a negative for creditors of the consolidated entity, although it is too early to speak to
possible rating actions if these initiatives were to become law.
Below are our base-case expectations for U.S. G-SIBs' operating performance for the remainder of 2017 (see also "U.S.
Banks Should See Higher Profits In 2017, But Plenty Of Wild Cards Are In Play," published Dec. 21, 2016):
• We expect revenues to rise moderately on the back of a continued increase in market interest rates, mid-single-digit
loan growth, and improved capital markets activity, partly offset by declining mortgage banking activity.
• We expect positive operating leverage in 2017, stemming from a continued rationalization of operating costs,
although regulatory expenses will likely remain at currently elevated levels and should continue to present
headwinds to cost cutting.
• We expect credit quality will worsen amid higher rates, leading to continued reserve build. We will continue to
monitor credit trends in energy and exposure to other high growth segments, including CRE (multifamily and
investor CRE), leveraged loans, credit cards, and auto loans. We also expect charge-offs to gradually rise.
• We expect loan growth in 2017 to be more broad-based, although C&I loans will probably continue to be a leading
source of this growth. We also expect a pickup in growth of credit card loans, with some of the focus shifting away
from CRE. We expect the pace of auto loan originations to moderate.
• We expect capital ratios to remain mostly steady, given that all large banks are already above their minimum
required regulatory ratios. We expect dividends and buybacks to increase due largely to improved earnings.
• We believe these banks will continue to issue total loss-absorbing capacity (TLAC)-eligible debt in 2017 and beyond
to comply with the final TLAC rule, effective Jan. 1, 2019. Separately, most banks are already in compliance with
the fully phased-in liquidity coverage ratio requirements, but we still expect them to maintain high-quality customer
deposits and large securities balances.
• We expect trust banks to benefit from higher rates, continue to control expenses, and to remain modest in building
capital in 2017.
Table 1
Adjusted Revenue
(bil. $)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Quarter over quarter (%)
Year over year (%)
BAC
20.9
21.7
22.0
20.3
22.6
11.1
8.3
C
17.6
17.5
17.8
17.0
18.1
6.5
3.2
GS
6.3
7.9
8.2
8.2
8.0
(1.8)
26.6
JPM
24.1
25.2
25.5
24.3
25.6
5.1
6.2
MS
7.8
8.9
8.9
9.0
9.7
8.0
25.1
WFC
22.2
22.2
22.3
21.6
22.0
1.9
(0.9)
Median
19.2
19.6
19.9
18.7
20.1
5.8
7.3
Source: Company reports. BAC--Bank of America Corp. C--Citigroup Inc. GS--Goldman Sachs Group Inc. JPM--JPMorgan Chase & Co.
MS--Morgan Stanley. WFC--Wells Fargo & Co.
Table 2
Net Interest Margin (Reported)
(%)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Quarter over quarter
Year over year
BAC
2.33
2.23
2.23
2.23
2.39
0.16
0.06
C
2.92
2.86
2.86
2.79
2.74
(0.05)
(0.18)
JPM
2.30
2.25
2.24
2.22
2.33
0.11
0.03
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Muted Loan Growth
Table 2
Net Interest Margin (Reported) (cont.)
(%)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Quarter over quarter
Year over year
WFC
2.90
2.86
2.82
2.87
2.87
0.00
(0.03)
Median
2.62
2.56
2.53
2.51
2.57
0.05
0.00
Source: Company reports. BAC--Bank of America Corp. C--Citigroup Inc. JPM--JPMorgan Chase & Co. WFC--Wells Fargo & Co.
Table 3
Income Statement
--Quarter over quarter (%)-Net
interest
income
Noninterest
income*
WFC
(1)
6
4
C
(3)
27
--Year over year (%)--
Net
income
Net
interest
income
Noninterest
income*
(25)
5
5
(4)
6
(44)
1
3
(3)
14
(3)
14
(1)
(11)
17
Noninterest
expense Provisions
Noninterest
expense Provisions
Net
income
JPM
3
9
9
47
(4)
6
8
7
(18)
17
BAC
7
15
13
8
3
5
11
1
(17)
40
*Excluding gains from securities transactions (if reported) and nonrecurring items. BAC--Bank of America Corp. C--Citigroup Inc.
JPM--JPMorgan Chase & Co. WFC--Wells Fargo & Co.
Table 4
Capital Markets Revenue*
Advisory
Debt
underwriting
Equity
underwriting
Total
investment
banking
FICC
(%)
Q/Q
Y/Y
Q/Q
Y/Y
Q/Q
Y/Y
Q/Q
Y/Y
MS
(21)
(16)
26
122
73
144
11
GS
7
(2)
13
25
47
70
15
(17)
8
14
39
24
99
JPM
(3)
(14)
15
73
32
BAC
55
17
14
38
70
Total
(0)
(5)
16
51
48
C
Total sales
and trading
Equity
Q/Q
Y/Y
Q/Q
Y/Y
Q/Q
43
17
96
3
(2)
9
16
(16)
1
8
(4)
(7)
7
39
22
19
12
10
21
92
12
37
25
17
40
2
66
31
37
49
29
16
7
92
15
33
20
24
14
1
Y/Y
Total capital
markets
Q/Q
Y/Y
27
10
31
(1)
(0)
5
17
17
21
29
13
24
18
38
23
36
26
18
15
18
20
*We define capital markets revenues as sum of equity underwriting, debt underwriting, advisory, equity trading, and FICC trading. BAC--Bank
of America Corp. C--Citigroup Inc. GS--Goldman Sachs Group Inc. JPM--JPMorgan Chase & Co. MS--Morgan Stanley. Q/Q--Quarter over
quarter. Y/Y--Year over year.
Table 5
Adjusted Operating Expenses
($ bil.)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Quarter over quarter (%)
BAC
14.8
13.5
13.5
13.2
14.8
12.8
0.2
C
10.7
10.4
10.4
10.2
10.5
2.7
(2.0)
GS
4.8
5.5
5.3
4.8
5.5
15.0
15.2
JPM
14.7
14.7
15.3
14.8
15.9
7.7
8.5
MS
6.1
6.4
6.5
6.8
6.9
2.4
14.6
13.0
12.9
13.3
13.2
13.8
4.4
5.9
WFC
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Year over year (%)
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Muted Loan Growth
Table 5
Adjusted Operating Expenses (cont.)
($ bil.)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Quarter over quarter (%)
Year over year (%)
Median
11.9
11.6
11.8
11.7
12.1
6.0
7.2
Source: Company reports. BAC--Bank of America Corp. C--Citigroup Inc. GS--Goldman Sachs Group Inc. JPM--JPMorgan Chase & Co.
MS--Morgan Stanley. WFC--Wells Fargo & Co.
Table 6
Balance Sheet
(Quarterly change, %)
Assets
Loans
Deposits
WFC
1.1
(0.9)
1.5
C
1.6
0.7
2.2
JPM
2.2
0.3
3.5
BAC
2.7
0.0
0.9
BAC--Bank of America Corp. C--Citigroup Inc. JPM--JPMorgan Chase & Co. WFC--Wells Fargo & Co.
Table 7
Asset Quality
NPAs*
NCOs¶
Reserves to loans
(bps)
Q/Q
Y/Y
Q/Q
Y/Y
Q/Q
Y/Y
WFC
(5)
(27)
(3)
(4)
(1)
(6)
C§
(5)
(12)
2
(3)
(1)
(14)
JPM**
(7)
(18)
(4)
1
(3)
(14)
BAC
(5)
(19)
3
(6)
(1)
(10)
*NPAs are reported nonperforming loans divided by total loans. ¶NCOs are total net charge-offs divided by average loans. §Citi's first-quarter
average loans is the average of gross loans from the fourth quarter and the first quarter. **JPM's NCOs for first-quarter 2017 exclude charge-offs
related to student loan portfolio write-down. BAC--Bank of America Corp. C--Citigroup Inc. JPM--JPMorgan Chase & Co. WFC--Wells Fargo &
Co. Q/Q--Quarter over quarter. Y/Y--year over year.
Table 8
Tier 1 Common Ratio
--Tier 1 common equity ratio - Basel III fully phased-in--
Basel III
minimum*
Current surplus
(deficit) from
estimated Basel
III minimum
(%)
Q1
2017
Q4
2016
Quarter-over-quarter
change (bps)
Advanced/standardized
(lower of the two)
U.S. Fed
G-SIB
surcharge
BAC
11.0
10.8
20
A
2.5
9.5
1.5
C
12.8
12.5
26
A
3.0
10.0
2.8
JPM
12.4
12.2
20
A
3.5
10.5
1.9
WFC
11.2
10.8
40
S
2.0
9.0
2.2
MS
16.6
15.9
70
A
3.0
10.0
6.6
GS
12.5
12.7
-20
A
2.5
9.5
3.0
BK
10.0
9.7
30
A
1.5
8.5
1.5
STT
10.9
10.9
0
A
1.5
8.5
2.4
*Including the Fed G-SIB surcharge. Source: Company filings. BAC--Bank of America Corp. C--Citigroup Inc. GS--Goldman Sachs Group Inc.
JPM--JPMorgan Chase & Co. MS--Morgan Stanley. WFC--Wells Fargo & Co. BK--Bank of New York Mellon. STT--State Street.
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