Q3 22 Trending Earnings Topics Recap – Week of October 17th, 2022

Two people reviewing a graph on a laptop and monitor

Welcome back to the weekly edition of our Q3 22 Trending Earnings Topics, reviewing macro trends and key management commentary. With another busy week of earnings that saw Fifth Third, State Street, Truist Financial, Western Alliance, Regions Financial, Banc of California, Hilltop Holdings and Snap report among others, here are some key trending topics that emerged during earnings updates over this period:

Q3 22 Trending Earnings Topics: Organizations across the board are reporting on elevated operating expenses triggered primarily by macroeconomic conditions, outlining any impact to their business performance and noting the expense mitigation measures being put in place to counteract it in 2023

Intuitive Surgical – Prepared Remarks

Pro forma operating expenses increased 24% compared with third quarter of 2021, driven by increased head count, higher R&D-related project costs, and higher travel costs. Growth in operating expenses has been primarily in support of our Ion platform, next generation robotics capabilities, our digital capabilities, and expansion of our infrastructure to allow us to effectively scale. We’re also seeing higher regulatory costs as a result of increased regulatory requirements globally and expansion of our new platforms into OUS markets.

As Gary mentioned earlier, during the quarter, we slowed our hiring pace, adding approximately 530 employees, lower than the 700-plus employees we have added per quarter in the last three quarters.

As we look forward to 2023, we expect our operating expense growth will be lower than the growth for this year. The slowing growth rate of operating expenses reflects the completion of some of our infrastructure and business process improvement investments and planned leverage in our enabling functions.

  • Jamie E. Samath – Intuitive Surgical, Inc., Chief Financial Officer

Northern Trust – Prepared Remarks

Expense growth of 9% reflected inflationary impacts across our cost base, particularly within our compensation and equipment and software lines. EPS was flat, and we generated a return on average common equity of 14.9%. New business activity in Wealth Management was encouraging, and we continue to engage actively with new and existing clients.

In asset management, weak markets and institutional cash outflows reduced assets under management, yet we saw continued growth in our alternatives, tax-advantaged equity, and ETF complex. And within Asset Servicing, we continued to win new mandates, and our backlog of new clients that haven’t yet been onboarded has expanded meaningfully and is expected to transition over the coming quarters.

  • Michael G. O’Grady – Northern Trust Corp., Chairman & Chief Executive Officer

Zions Bancorporation – Prepared Remarks

Revenue grew by 16% from a year ago, when excluding PPP income, grew by 26% over the same period. We expect client activity and the positive impact of higher interest rates to continue to improve this measure over the coming quarters.

Noninterest expense, on slide 13, increased 3% from the prior quarter to $479 million. Salaries and benefits grew by $5 million. The primary drivers included the additional staffing and an extra day in the quarter compared to the second quarter. We continue to feel the impact of inflation, which is showing in smaller but numerous increases in several other expense categories. Our outlook for adjusted noninterest expense is to moderately increase by the third quarter of 2023, when compared to the third quarter of 2022.

  • Paul E. Burdiss – Zions Bancorporation, NA, Chief Financial Officer

State Street – Prepared Remarks

On a line-by-line basis compared to third quarter 2021, compensation/employee benefits were down 1%, as the impact of currency translation was partially offset by higher salary costs associated with wage inflation and higher head count. Headcount increased 6%, primarily in our Poland and India global centers as we invested in important technology capabilities and added operations talent to support new products and services in growth areas such as Alpha, private markets and in middle-office servicing. There’s also a portion of the head count increase associated with some hiring catch-up post COVID. We expect head count growth to start to level off.

Information systems and communications expenses were down 2%, as we began to see benefits from our insourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments. Transaction processing was down 10%, mainly reflecting lower sub-custody costs related to equity market movements. Occupancy was down 5%, largely due to currency translation. And other expenses were up 17%, primarily reflecting higher securities processing costs, marketing costs, travel costs and foundation grants.

  • Eric W. Aboaf – State Street Corp., Vice Chairman & Chief Financial Officer

Regions Financial – Prepared Remarks

So, let’s move on to non-interest expense. Reported professional and legal expenses reflect a charge related to the resolution of a previously announced regulatory matter. We do anticipate $50 million of this charge will be mitigated by insurance reimbursement proceeds, which we expect to receive in the fourth quarter. Excluding this and other adjusted items, adjusted non-interest expenses increased 4% compared to the prior quarter.

Salaries and benefits increased 3%, primarily due to an increase of 277 full-time equivalent associates, as well as one additional day in the quarter. This increase was partially offset by lower variable-based compensation and a decrease in payroll taxes. Over 70% of the increase in associate head count are customer-facing within our three lines of business.

We expect full year 2022 adjusted non-interest expenses to be up 4.5% to 5.5% compared to 2021. Importantly, this includes the full year impact of the acquisitions we completed in the fourth quarter of last year, as well as inflationary impacts. With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 6% in 2022.

  • David Jackson Turner – Regions Financial Corp., Senior Executive Vice President & Chief Financial Officer

The Goldman Sachs Group – Q&A

Question – Steven Chubak: So, wanted to start with a question on expenses. You spoke of expense mitigation efforts as part of the broader realignment strategy. What’s the level of non-comp inflation we should be contemplating, recognizing we’re still dealing with inflationary headwinds, you alluded to more proactive measures to mitigate expense growth? Just want to get a sense, if the goal is to actually slow non-comp growth or to deliver absolute reductions in expense.

Answer – David Michael Solomon: Thanks for the question, Steven. I’ll start at just a high level, and then Denis will go through some details with you in terms of how we’re thinking about it. But I do think there are different factors that are leading to the expense growth, but one is there is definitely an inflationary pressure that’s affecting certain aspects of the business. We’re obviously looking at that and thinking about that carefully. I do think we’re making investments across the platform, particularly in certain technology infrastructure, and that’s having an impact that will be more medium term. We think those are important investments that we need to make. At the same point, though, given the environment, we’re extremely focused on trying to mitigate any expense growth to the degree we can.

Now, there’re going to be headwinds given the natural inflation that sets in, but why don’t I have Denis kind of walk through and break down some of the different components that we’ve been focused on.

Answer – Denis P. Coleman: Sure. So, if we take a step back, we look at our overall level of operating expenses year-to-date, they’re down 6% compared to the prior year-to-date period. They are up 1% sequentially. Drivers obviously across both comp and non-comp. If you look at the non-compensation growth over the course of the last year, roughly half of that is attributable to expenses associated with the integration and run rate of NNIP and GreenSky together with change in litigation. So, that is representing about half.

The balance, as David indicated, we do see some impact from inflation. We do see the impact of higher levels of transaction-based expenses, but we are also taking actions to reduce expenses within the overall non-compensation category where we can. You may note that on a quarter-over-quarter basis, we reduced our professional fees, something that we indicated in our previous earnings release. And we’re going to continue to think very, very disciplined about the way in which we deploy non-compensation expenditures, striking the balance of driving towards our efficiency ratio, but as well as making the investments that we think are appropriate to continue to strengthen and grow the firm.

  • David Michael Solomon – The Goldman Sachs Group, Inc., Chairman & Chief Executive Officer
  • Denis P. Coleman – The Goldman Sachs Group, Inc., Chief Financial Officer

Q3 22 Trending Earnings Topics: While the ongoing inflation paves the way for bottlenecks in international revenue due to FX impacts among other factors, many companies are still reporting on positive growth in global markets, while others are sharing plans for business expansion on a global scale

Schlumberger NV – Prepared Remarks

Growth will be simultaneous in North America and in international markets. This started first in the North America market and we are ready – we are already witnessing the next phase of growth with an acceleration in pace in the offshore and international markets that was very visible in the third quarter.

In the US land markets, we are participating more profitably in a more accretive and lower capital intensive market segment where technology, performance premium (08:25) and our technology access business model are driving solid revenue and margin growth.

In the international and offshore markets, we have increased market access and enhanced our participation across the value chain through a combination of portfolio actions, fit-for-basin technology and higher wallet share on account of our performance and integration capabilities. The next phase of global market inflection is expected to be driven by increasing activity in the Middle East. Looking ahead to the fourth quarter, we expect another quarter of sequential revenue growth and EBITDA margin expansion to close the year. Sequential growth will reflect historical seasonal trends. The international markets will be driven by a sequential uptick in Middle East activity as capacity expansion projects begin to mobilize. Global offshore activity will continue to strengthen, offset by the approaching seasonality in the Northern Hemisphere while North America land activity is expected to moderate its growth trend. This combination will result in fourth quarter year-on-year revenue growth in the mid-20s and 200 bps EBITDA margin expansion when compared to the fourth quarter of 2021.

  • Olivier Le Peuch – Schlumberger NV, Chief Executive Officer & Director

Interpublic Group of Cos – Prepared Remarks

We’re pleased to report a strong third quarter and nine months. Third quarter organic growth was 5.6%. That’s on top of very strong 15% growth a year ago, and it brings our three-year organic growth stack over the period of COVID to 16.9% in the third quarter. Over the first nine months of the year, our organic growth was 8.2% on top of 12% a year ago, which brings three-year growth to 15.7% for the first nine months. Those three-year numbers continue to lead the industry.

We once again posted growth across our US and international markets. Domestically, organic growth for the quarter was 4.4% on top of 14.7% in last year’s third quarter, and organic growth in our international markets was 7.8%, highlighted by growth in every region of the world, and that was on top of 15.4% growth a year ago.

  • Philippe Krakowsky – Interpublic Group of Cos., Inc., Chief Executive Officer & Director

Baker Hughes – Prepared Remarks

In Oilfield Services, we remain optimistic on the outlook for the sector with growth trends now clearly shifting more in favor of the international markets. The team continues to execute well as they capture net pricing increases and supply chain pressures gradually moderate. Internationally, growth continues to be led by Latin America, West Africa, and the Middle East. In all of these markets, offshore activity is noticeably strengthening while our drilling services and completions business are well-positioned to win.

In Latin America, Brazil offers the best combination of visibility and growth in the region while Mexico and Guyana are also improving. Similarly, in West Africa we are seeing offshore projects move forward in multiple countries in the region. In the Middle East, Saudi Arabia and UAE are exhibiting the best near-term growth that is expected to continue into 2023 and beyond. Looking ahead, we expect continued growth through the end of this year and double-digit international growth in 2023.

In North America, pricing across our portfolio remains firm, while drilling and completion activity are beginning to level off after significant growth over the last two years. Although the US market will be more dynamic and dependent on oil prices, we generally expect solid activity levels through the end of this year with an opportunity for modest growth in 2023 driven by public operators.

  • Lorenzo Simonelli – Baker Hughes Co., Chairman & Chief Executive Officer

Genuine Parts – Prepared Remarks

In addition, as another example of our emerging tech focus, Motion recently established a new electric vehicle battery customer segment based on increasing opportunities presented by the build-out of new battery manufacturing facilities across North America. We continue to build momentum with our EV efforts as we leverage our global footprint, business mix and scale to extend our emerging tech leadership position.

In Canada, sales grew approximately 15% in local currency during the third quarter with comparable sales growth of 13%…In Europe, our Automotive team delivered another strong quarter with total sales increasing approximately 20% in local currency and comparable sales up 7%. Growth in Europe is a result of the continued focus on its strategic initiatives, including growth with key customer accounts, the rollout of the NAPA brand across the region and investments in our people, technology and supply chain capabilities…Our recent acquisitions in Germany, Spain and Portugal are tracking well with integration plans, and the performance and synergy capture has exceeded our internal expectations. Overall, we believe our European strategies have resulted in solid market share gains…In the Asia-Pac Automotive business, sales in the third quarter increased approximately 16% in local currency from last year with comparable sales growth of 14%…Next month, our Australian and New Zealand team will celebrate Repco’s 100-year anniversary, which is a testament to the power of the brand, differentiated customer value proposition and Repco’s position as the leading automotive aftermarket business in the market. Congratulations to our teammates down under on achieving this incredible milestone.

  • William P. Stengel – Genuine Parts Co., President

Financial Institutions are proactively reporting strong NII growth for the quarter, while others are not sharing explicit guidance for NII trajectory in 2023 due to uncertainties in the macro environment

Regions Financial – Prepared Remarks

Let’s shift to net interest income and margin. Reflecting our asset-sensitive profile, net interest income grew $154 million, or 14%, quarter-over-quarter while reported net interest margin increased 47 basis points to 3.53%. Our adjusted margin was 3.68%, reflecting the combined effects of average cash balances of $14 billion and PPP. The cycle to-date deposit beta remains low at 9%, contributing to higher-than-anticipated net interest income growth. We expect full year deposit betas in the high-teens.

In addition to higher rates, growth in average loan balances provided further support for net interest income. Looking forward, while we do expect cash balances to continue to normalize, we do not anticipate accessing more expensive wholesale borrowing markets for multiple quarters. This, coupled with additional hedge maturities in the fourth quarter, provides further runway for margin expansion.

Total net interest income is projected to increase 7% to 9% in the fourth quarter, and is now expected to be approximately 33% to 35% higher than the first quarter of 2022. Reported net interest margin is projected to surpass 3.80% in the fourth quarter.

  • David Jackson Turner – Regions Financial Corp., Senior Executive Vice President & Chief Financial Officer

SVB Financial Group – Q&A

Question – Steven Alexopoulos: Hey, good morning, everyone, or good afternoon, actually, sorry. I wanted to start with a big picture question. So asset sensitivity has declined, but you’re still asset-sensitive and we are rates basically moving up across the entire curve, which would suggest you should see some benefit potentially to NIM, but definitely the NII. But at the slides, you’re guide into both NII and NIM have now peaked. Can you just explain for us what’s happening in the real world that your asset-sensitive model is not capturing because the guide it’s almost looks like you’re a liability sensitive back here.

Answer – Daniel Beck: Yeah. Steve, it’s Dan. So if you think about what’s happening, we continue to have asset sensitivity on the static balance sheet, but we continue to shift from non-interest bearing to interest bearing and use of off-balance sheet, client funds on the balance sheet driving interest-bearing to have higher levels of interest costs from an end of quarter perspective. So while we are still getting some benefit from a net interest income sensitivity perspective, that shift in mix to higher levels of interest bearing in this environment while we’re seeing higher cash burn and slower deployment in the venture space, is driving weaker net interest income on a quarter to quarter basis.

  • Daniel Beck – SVB Financial Group, Chief Financial Officer

Citizens Financial Group – Prepared Remarks

On slide 6, net interest income was up 11% given higher net interest margin and 2% growth in interest-earning assets. The net interest margin is 3.25%, up 21 basis points. As you can see on the NIM walk in the bottom left-hand side of the slide, the healthy increase in asset yields outpaced funding costs, reflecting the asset sensitivity of our balance sheet.

Moving to slide 7. With the current expectation for the Fed to raise rates further, we are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out. Our asset sensitivity has driven a significant improvement in NII year-to-date, and those benefits will continue to accumulate into the fourth quarter and compound into 2023. Our overall asset sensitivity increased to approximately 3.3% at the end of the third quarter, up from 2.6% for the second quarter, primarily driven by the impact of variable rate loan originations. Our asset sensitivity will allow us to have further upside if the forward curve continues to move up.

  • John F. Woods – Citizens Financial Group, Inc. (Rhode Island), Vice Chairman & Chief Financial Officer

The Travelers Cos – Q&A

Question – Ryan Tunis: Hey. Thanks. Just a couple for me, so Dan, you were talking about the NII guidance and how rates have moved since 9/30. Is that guide trued up for where we are today in terms of rates? Or is that just as of where new money was at 9/30.

Answer – Daniel S. Frey: You’re getting a little fine there, Ryan, in terms of whether we’re going to change it every two weeks. We’ve seen rates move up and down a little bit. It’s been fairly volatile in the last 30 days. I would say, generally speaking, it’s reflective of the current environment. And I wouldn’t put a specific date on it.

  • Daniel S. Frey – The Travelers Cos., Inc., Executive Vice President & Chief Financial Officer

KeyCorp – Prepared Remarks

Revenue was up 5% relative to the second quarter, driven by higher net interest income, with a 13 basis point increase in our net interest margin. One thing that sets Key apart is our approach to managing interest rate risk. We have been very deliberate and intentional in managing with a long-term perspective. While our net interest income is expected to be up double digits this year, our balance sheet positioning presents a unique and significant upside for Key over the next two years.

  • Christopher M. Gorman – KeyCorp, Chairman, Chief Executive Officer, President & Director

Thanks for reading this issue of the Earnings Recap blog for the Q3’22 Earnings season. Stay tuned for our trending topics recap next week.

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