Q1’23 Trending Earnings Topics Week of April 17, 2023 Recap

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Welcome back to the first weekly edition of our Q1’23 Earnings Topics Week of April 17 recap on trending topics, macro trends and key management commentary. With a busy week of earnings that saw some major banks reporting, JPMorgan Chase & Co., Citigroup, Citizens Financial, Goldman Sachs, Huntington Bancshares, M&T Bank, Comerica, F5, and Zions Bancorporation were some of the notable names.

Here are some key trending topics that emerged during earnings updates over the last week:

Many institutions that reported this quarter are being asked about their thoughts on how the SIVB closure will impact their business operations. Some companies are also reporting on the implementation of preventative measures where applicable, while others are considering potential opportunities to generate new business in the marketplace following the FDIC takeover of Silicon Valley Bank.

Banking Sector Commentary

Bank of America – Q&A

Question – Steven Chubak: Yeah, helpful color, Brian. And just for my follow-up, I was hoping either you or Alastair could provide just an update on expectations around upcoming regulatory development, specifically how your scenario planning for Basel 4, any expectations around the FDIC special assessment? There were a lot of items that had been floated just given recent events in the SVB fallout. I was hoping to get some perspective just in terms of regulatory mark-to-market.

Answer: Yeah. I mean, I think we don’t have anything more than you do in a broad sense. But I think, at the end of day I think this industry has extremely strong capital liquidity and capabilities that we just demonstrated through the pandemic and then through the aftermath of the pandemic and then through inflation, and then through a tightening cycle that hasn’t happened before. So I feel good about where the industry stands, and I think people have to step back and think about it overall.

And then frankly, this industry in the United States is so much stronger than Europe. It has so much capital per square inch, so to speak, than Europe does to get to ratios which on numbers are lower, but the amount of capital to get there is pretty unbelievable. So we have twice the capital as our European counterparts of similar size and the ratios are considered to be lower.

So, obviously as they pull this together they’ve got to make sure they aren’t counting the beans different ways with the gold plating and other things in United States. So hopefully, people are starting to see the wisdom and making sure they’re careful here. And we’ll see how it play out, but we don’t have any special understanding.

  • Brian T. Moynihan – Bank of America Corp., Chairman & Chief Executive Officer

M&T Bank – Q&A

Question – Manan Gosalia: Just on the deposit side, it’s not surprising that deposits ended the quarter below the average. Can you talk a little bit about the trajectory of deposits in the second half of March? How much – I guess, how much the deposit balances changed through from Feb 28 through the impact from SVB through quarter end, and even if you have, what’s been happening quarter-to-date this quarter?

Answer: Sure. I guess I would just caution on drawing cause and effect that – the numbers are the numbers, but whether the decline that happened in March was specifically attributable to the SCV (sic) [SVB] or Signature challenges is difficult to say just because there’s normal activity that happens in the first quarter, right?

As we mentioned, the trust demand balances move based on capital markets, not an activity, not necessarily because of an exogenous event. But roughly when you look at the decline in total deposits over the quarter was about 60% happened before March and 40% happened in March. So a little bit heavier March, but as you get into that March timeframe, that’s when we got our distribution from Bayview, which is when distributions often get paid right in front of taxes for commercial clients.

  • Darren J. King – M&T Bank Corp., Senior Executive Vice President & Chief Financial Officer

Huntington Bancshares – Q&A

Question – Steven Alexopoulos: Got it. Okay. Thanks. So, maybe just one last one for Steve. Just following up on your response just now to Jon’s question. Given the speed at which deposits went out, Silicon Valley Bank, when you look at that, do you view that from a distance as a unique one-off event, or are there lessons that you’re now applying the way you think about managing capital, risk, liquidity that even a stable regional bank like yourself will change potentially fairly materially in the aftermath of what we just saw? Thanks.

Answer: Steve, I think there are always lessons learned, but the business models of SVB and Signature were so different from us and other regional banks, but particularly from us, the concentrations of the uninsured deposit were about 95%. Just in retrospect, it seems rather clear that the liquidity risk was very, very different and a huge mess, combined with the asset liability. In terms of lessons for us, it’s (00:59:25) that we are much more aware of liquidity.

We’ve always seen this as a prime risk, we’ve always set good backup and we’ve been very granular, an advantage to have that best-in-class uninsured to total deposit ratio. But we’ll probably be even more cautious, that probably we’ll be even more cautious given the speed at which things move as we go forward.

Having said all that, we’re in a very strong position today. We expect to grow deposits as we continue through the year. And so it’s like extra vigilance. We may do some policy adjustments to reinforce and strengthen further, but that will be of minor nature, I don’t think it will impact our performance.

  • Stephen D. Steinour – Huntington Bancshares, Inc., Chairman, President & Chief Executive Officer

Comerica – Q&A

Question – Steven Alexopoulos: Good morning. Good morning, everyone. So, no surprise, I want to start on the deposit side. First, the color you provide in the slides is really helpful. I’m curious when we look at the decline in the deposits from March 9 through the end of the quarter, I’m surprised that TLS specifically, was it a beneficiary of the SVB situation.

And even when I look at the decline in Corporate and Middle Market, I’m again surprised because I would have thought the company would have been somewhat of a port to start (00:21:39), right. I mean, you’ve been in markets for decades, you’ve been with customers for decades. Could you take us behind the scenes, what did you hear from your customers during this time in each of those and why were they moving balances away from the company?

Answer: Steve, this is Peter. So, I would tell you that in the very beginning, for sure, we actually took on a lot of accounts and Curt mentioned in his remarks that we opened a number of accounts from customers that were wanting to come to Comerica from the other banks that had failed. So, during that time, we definitely took on new customers. I think the average balance probably is just not as high. But on the whole, we saw some departures.

Some of that is because we’ve got a lot of late stage also, which a lot of late stage TLS customers are going to have more deposits, but not as much credit. And so, that’s where you did see some diversification wanting to occur at that level. But net-net, if you look at our TLS slide in the back, we have seen deposits coming down in that space going back to second quarter of last year, really. So, what’s occurred I think in this space in general has been burning through cash.

So, we saw that. But we didn’t necessarily think that we would be taking on excess deposits fleeing from SVB coming to us out of this deal. We did take on more accounts and we definitely saw that. We also saw, during the period, as I mentioned, already, late stage fleeing, but we saw some accounts sort of spreading across not just us, but other banks as well out of the TLS

  • Peter Sefzik – Comerica, Inc., Senior Executive Vice President & Chief Banking Officer

Fifth Third Bancorp – Q&A

Shifting to the income statement. We expect full year NII will increase 7% to 10%. As other banks have noted, industry-wide deposit pricing pressures intensified in the wake of the Silicon Valley and Signature Bank failures. Therefore, as shown in our presentation materials, we are providing NII guidance under a range of deposit betas, given potential diverging levels of intensity with respect to deposit competition going forward.

The upper end of our NII guidance assumes an approximate terminal beta of 43%, and the lower end assumes approximately a 49% terminal beta compared to our January expectation of 42%. The midpoint of our NII outlook translates to a 47% beta with total interest-bearing deposit costs increasing 45 basis points or so in the second quarter and another 25 basis points in the second half of the year.

Our outlook also considers the lag effects from previous rate hikes and continued DDA migration and assumes the Fed hikes 25 basis points in May, and then holds short-term rates of 525 basis points for the remainder of the year. Our guidance assumes that our securities portfolio balances decline a couple of billion dollars between now and year-end and that we hold closer to $10 billion in excess cash for most of the year.

  • James C. Leonard – Fifth Third Bancorp, Executive Vice President & Chief Financial Officer

Additional Commentary (Non-Banks)

F5, Inc. – Q&A

Question – Sami Badri: Okay, got it. And maybe a question for François. I think one thing we really kind of want to know is, if you were to think about which customer industry group really caused the majority of the drag or the impact to the revision of the guide for fiscal year 2023, which customer cohort or customer vertical really kind of caused that, if you could put your finger on one?

Answer: Thanks, Sami. So a couple of indicators on that. The first is what we have seen in our second fiscal quarter is this pullback in spending has been broader and more severe, frankly, across all vertical and all geographies.

And so, I would say all verticals and geographies are affected at this point. If I had to pull out a couple, I would say, the financial services in the – especially in the second half of March, where we saw a number of large deals being pulled out, delayed or downside or delayed by multiple quarters. Financial services was impacted prior to the collapse of SVB, but we did see even more caution in the financial services industry after that, and we expect that will persist.

  • François LocohDonou – F5, Inc., President, Chief Executive Officer & Director

United Airlines Holdings – Prepared Remarks

And by the way, we still remain below our historical GDP relationship, arguably indicating more room to run on the revenue recovery. However, it seems clear that the macro risks are higher today than they were even a few months ago as demonstrated by the banking scare of the Silicon Valley Bank. We saw an immediate drop in close-in business demand that lasted for about two weeks, but now appears to have recovered. Our base case, therefore, remains a mild recession or soft landing which is consistent with what we’re currently seeing in our bookings. But we agree that the tail risk is higher than normal.

  • J. Scott Kirby – United Airlines Holdings, Inc., Chief Executive Officer & Director

Alaska Air Group – Q&A

Question – Brandon R. Oglenski: Okay. I appreciate that. And then can you give us any detail on business travel trends in your network, especially given Silicon Valley Bank in March?

Answer: Yeah. I think on a macro level, and again, I just went back and look at the ARC data as well as our own data, around the weeks of all of that. And essentially the booking levels, there’s blips here and there, but they’ve sort of really been stuck at this back (00:32:47) in our network at least 75% with revenues close to the 85% and 90%. I think, as we look forward, we’re not forecasting it, but we’re hoping to see as we move past some of these little shocks to the system that business travel comes back a little bit better than the 75% it’s been at, but we’re not expecting it.

  • Andrew Harrison – Alaska Air Group, Inc., Executive Vice President & Chief Commercial Officer

The probability of entering a recessionary environment in the second half of 2023 has been frequently discussed by numerous financial institutions and notable industry experts. This quarter, organizations are sharing their assessment of the potential impact of an economic downturn, and precautionary steps that are being implemented to weather the event

U.S. Bancorp – Q&A

Question – Matt O’Connor: Okay. Sorry about that. I was just asking about the outlook for the loan loss reserves from here in your base case.

Answer: Yeah, so our expectation is that, again, Andy’s talked about the fact that we’re preparing for any economic sort of outcome that might exist. I think if you end up looking at the consensus in the marketplace, some form of recession probably a softer or moderate sort of recession late this year or early next year, and if you look at the market implieds, that would kind of tie into that.

When we go through our reserving process, we look at multiple scenarios. We weight to the conservative side. We look at five different scenarios. We make assumptions with respect to that. Only 35% of it’s weighted toward what I would call the base case and the rest of it is downside. So we feel pretty good about where rate reserve levels are. Obviously, if we saw an economic shock above and beyond kind of what is being expected, that might be a little bit different, but – and we feel pretty good about how we’re thinking about it.

  • Terrance R. Dolan – U.S. Bancorp, Chief Financial Officer & Vice Chairman

Equifax – Prepared Remarks

Our guidance continues to assume a weakening US and global economy in the second half. Given the slightly weaker US mortgage market that we saw principally in March, we are now assuming US mortgage market inquiries for 2023 to be down about 32% or 200 basis points weaker than we discussed in February.

Given our strong and broad-based performance in the first quarter, our ability to continue to outperform our underlying markets and execution on our planned 2023 spending reductions, we are reaffirming our 2023 guidance in a continued challenging mortgage market and expected slowing economy in the second half. We also continue to expect to deliver adjusted EBITDA margins of over 36% in the fourth quarter, which is a very important stepping off point for 2024. 

  • Mark W. Begor – Equifax, Inc., Chief Executive Officer & Director

Omnicom Group – Q&A

Question – Steven Cahall: Thank you. So John, you said that you don’t want to fight the Fed. It seems like maybe the Fed is winning the fight with inflation. That usually means either a weaker consumer or higher unemployment. So, I’m just wondering if that’s your subsequent expectation. And what does that translate to in terms of any growth implications for the company or how you’re thinking about managing the business through that? And then, I have a couple follow-ups for Phil.

Answer: Sure. Well, the Fed hasn’t stopped. So, the world is still fighting it. And with the employment numbers, they don’t look as bad maybe as they could. But the jury is still out about if the Fed is going to be able to get us into a recession, they’re certainly trying to slow growth. If they do – as I said, we’ve been playing game theory here for quite a number of years in terms of how we would respond to it when we see it, when we believe it’s going to occur.

We do, though, have the philosophy that when long-term partner-type clients suffer, we’re going to suffer a little with them. And that’s proved to be a very sensible investment in the past when we faced, I think, more severe circumstances because clients don’t forget that, and as they recover, you benefit from it as well. So at this point, we’re comfortable with – we’re certainly now comfortable with the low end of the range that we gave you last quarter. We’ll strive very hard to get to the top end, but there’s too many uncertainties as we sit here today for me to be promising that to you. As soon as we can, we will. So again – maybe I didn’t quite answer all of your questions.

  • John D. Wren – Omnicom Group, Inc., Chairman & Chief Executive Officer

Morgan Stanley – Q&A

Question – Ebrahim H. Poonawala: Good morning. I guess just first question I wanted to follow up on, James, a comment you made about expecting 2023 to end on a constructive note. I was wondering if you can elaborate on that just in terms of a lot of this is tied to macro. How do you think the economy playing out in terms of the Fed’s fight against inflation, damage it does to the economy and the markets? And as you think about ending 2023, where do you think we’ll be on all these fronts by the time the year ends?

Answer: Well, our house call out for the markets to end about flat from where they started at the beginning of the year, and I certainly support that. I think the two wildcards out there are geopolitical risk, which we can’t really handicap. My gut is that the US-China relations, while having their moments of tension, remain overall stable through this year, and global trade remains stable.

The second risk, of course, is that the Fed’s actions doesn’t bring down inflation, while the evidence so far is it is bringing down inflation, but they’re probably not done. I think it’s likely we’ll see at least one more and possibly two more rate increases. That gets you to sort of high 5%, 6% type interest rates, which is not shocking. And if we get through that, again, many people are calling for a modest recession. It might be. I don’t know, obviously. But my gut is, whether it’s a modest recession or we dodge that bullet, sort of doesn’t matter that much.

What really would matter is if inflation is not tamed, Fed has to go much higher than people are expecting. You go into a much deeper recession. That’s certainly not a likely outcome at this point. So that’s why I said, I think I used the words, constructive. For Morgan Stanley, if the sort of green shoots we’re starting to see, again, I don’t think they’re a Q2 type event. But back half of the year and next year in banking and underwriting, we just had a global risk committee yesterday discussed some of this stuff. And certainly, underwriting calendar, it looks like it’s picking up a little bit through the back half of the year.

  • James Patrick Gorman – Morgan Stanley, Chairman & Chief Executive Officer

State Street – Prepared Remarks

Investors had to contend with significant market movements and volatility, driven by persistent inflation, continued Central Bank interest rate increases and the recent disruption to certain segments of the banking industry. First quarter global financial market performance was choppy. January produced a very strong start to the year, with gains across most asset classes, including equities recording the strongest start to a year since 2019.

However, investors remain cautious about the prospect of enduring inflation and a potential recession in the United States. February saw that encouraging start receive, as strong US employment data led to growing concerns about the persistence of inflation, which in turn saw market expectations for Central Bank rate hikes increase, fixed income and equity markets declined and the US dollar strengthened.

March saw continued rising Central Bank rates, which in turn drove shocks to both the US regional and international banking sectors and the need to resolve a number of banks. All this drove negative market sentiment, contributing to large inflows into money market funds and a reversal of a number of the macro trends from the prior month. Both current interest rates and rate expectations decreased and the US dollar weakened, although relative comm (00:03:43) returned to markets by the end of the quarter.

  • Ronald Philip O’Hanley – State Street Corp., Chairman, President & Chief Executive Officer

Thanks for reading this issue of the Earnings Recap blog for the Q1’23 Earnings season. Stay tuned for our trending topics recap next week!

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