EquityResearch2January2019COREBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE163.U.S.Large-CapBanks2019OutlookPast,Present&YettoCome:LessGoodDoesn’tMeanBad,BuyBanksWearebullishontheU.S.Large-Capbankstocksfor2019.DespiteanexpectedslowdowninGDPgrowth,postasharpsell-offintoyear-end2018,webelievetheU.S.Large-CapbankstockshavetheabilitytoriseandoutperformtheS&P500.Whileinvestorsseemtowantmoreofacatalystthanwecanoffer,weexpectourcoveragetobenefitfromcontinuedearnings/bookvaluegrowth,activecapitalmanagement,‘regulatoryfinalization’,andanincreasingbenefitfromleveragingtechnology/economiesofscale.Furthermore,shouldtheeconomicbackdropbemorechallengingthanourbasecase(~2%GDPgrowth,two25bpFedhikes,andalowerunemploymentrate),webelievethegroupwillprovetobemoredefensivethaninvestorsappreciate.Weexpecthigh-single-digitEPSgrowthin2019despitea30%increaseintheloanlossprovision.WebelievefurtherEPSgrowthispossibleinto2020.Whilewehaveloweredour2019EPSestimatesby3%atthemedianbankreflectingatouchslowerGDPgrowth,aflatteryieldcurve,andlowermarketsensitiverevenues,weexpectseveralpositivetrends.Welookforresultstobenefitfromimprovedloangrowthfromachallenged2018asseveralheadwindsdissipate(weseelesspay-offs,repatriation,competition,andrun-off),furthernetinterestmarginexpansion(Fedstillsaysitwillhike,depositbetasrisingbutlow),positiveoperatingleverage(lackofDIFsurchargehelps),andveryactivesharerepurchase(canbuybackmoresharesatreducedprices).Despiteloweringourpricetargets,theyimply~40%upsideforthemedianbank.ThisassumesaforwardP/Eof11.7xourupdated2019EPSestimates.At8.9xforwardEPSanda62%P/ErelativetotheS&P500,thegroupistradingatitslowestlevelssince2011and2002,respectively,des...
