2016 Future of Financials Conference
Management and client bullishness implies
further upside
Price Objective Change
Equity | 17 November 2016 Corrected
Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com
Conference tone bullish into 2017
We recently hosted over 90 public and private companies and 700 attendees at our
Future of Financials conference, where investor attendance was up an impressive 66%
YoY. The tone from management and investors was uniformly bullish, with more
generalists attending than we have seen in previous years.
Revenue & regulatory upside + positioning = raising POs
We are raising our price objectives across most of our names. Three primary reasons
why we think there is upside remaining after the recent rally: 1) an improved outlook on
both activity levels and interest rates, driving revenue upside; 2) potentially lower
regulatory burden, particularly as new supervisory leadership can come with the new
administration; and 3) relatively lighter positioning in US financials vs. other sectors.
Full house at innovation-focused panels
New this year, we hosted expert panels on the evolution of clearing, fixed income
market structure, equity market structure, and payments, and how innovation in
blockchain, big data, and robo advisory can change the game. Strong panel attendance
suggested high interest in these themes, and polling feedback suggests shareholders
want banks to make investment spend in innovation a priority -- so long as it is self
funded with savings found elsewhere.
Banks: Most constructive we've heard in years
We are raising our POs for our banks by c11% (see Table 1 page 63). When asked if the
election results changed 2017 outlooks, all banks were more enthusiastic about growth.
Echoing sentiment from our panel on regulation and M&A, banks were upbeat on the
CCAR process potentially evolving post-election. Our top picks out of the conference:
WFC (sentiment over retail sales practices clouding EPS sensitivity to improving macro),
C (solid momentum on revenues and capital return), IBKC (moving closer to strategic
targets), and EWBC (sentiment post-election appears constructive on regulatory relief).
Brokers, Alternatives, and Asset Managers
The sentiment around the capital market sector was mostly favorable post the election
outcome, given the potential for de-regulation, pro-growth, rising rates, lower tax rates,
and increasing activity levels. For the brokers, given mostly favorable 4Q activity trends
(more so for trading vs. banking), 1H17 seasonality with easy comps, and potential for
de-regulation and lower taxes – we like the outlook, particularly for GS. For the asset
managers, despite the move higher post the election on a potential DOL
delay/modification and lower tax rates, most expect the DOL to continue in some form
and the core trends remain challenging – we remain cautious. For the alternative
managers, while we continue to view the structural growth as attractive and a lower
corp tax rate could potentially increase the odds of a transition to a C-corp , given the
potential for a higher carry tax, rising rates, and de-regulation of banks potentially
moderating some of the newer growth areas, we view the outlook as more balanced.
Specialty / Consumer finance
Companies were generally bullish on the US consumer heading into 2017. AXP
presented a fairly upbeat outlook on billings, loan and revenue growth, while cautioning
that Discount rate pressures and FX headwinds could impact near-term results. The
private tech based lenders were cautiously optimistic that hiccups from earlier this year
were behind the sector, while the private payments companies stressed the importance
of partnering with incumbent leaders and the need to maintain safety standards.
BofA Merrill Lynch does and seeks to do business with issuers 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 this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 78 to 81. Analyst Certification on page 75. Price Objective
Basis/Risk on page 64. 11687665
Timestamp: 17 November 2016 06:24AM EST
United States
Banks
US Financials
MLPF&S
Erika Najarian
Research Analyst
MLPF&S
+1 646 855 1584
erika.najarian@baml.com
Michael Carrier, CFA
Research Analyst
MLPF&S
+1 646 855 5004
michael.carrier@baml.com
Ebrahim H. Poonawala
Research Analyst
MLPF&S
+1 646 743 0490
ebrahim.poonawala@baml.com
Kenneth Bruce
Research Analyst
MLPF&S
+1 415 676 3545
kenneth.bruce@baml.com
See Team Page for Full List of Contributors
Conference tone bullish into 2017
We recently hosted over 90 public and private companies and 700 attendees at our
Future of Financials conference, where investor attendance was up an impressive 66%
YoY. The tone from management and investors was uniformly bullish, with more
generalists attending than we've seen in previous years. When asked how they would
describe their portfolio positioning in financial stocks, 60% of the investors polled noted
that they are either slightly overweight or very overweight the sector (see Chart 1).
Chart 1: How would you describe your portfolio positioning in financial stocks, excluding insurance
and REITs?
40%
37%
35%
30%
25%
20%
15%
10%
5%
0%
23%
16%
15%
Very overweight Slightly overweight Neutral Slightly
underweight
9%
Very underweight
Source: BofA Merrill Lynch Global Research
New this year, we hosted expert panels on the evolution of clearing, fixed income
market structure, equity market structure, and payments, and how innovation in
blockchain, big data, and robo advisory can change the game. Strong panel attendance
suggested high interest in these themes, and polling feedback suggests shareholders
want banks to make investment spend in innovation a priority -- so long as its self
funded with savings found elsewhere. 68% of those polled across multiple company
presentations believed that institutions should invest in innovation projects but be
mindful of self-funding (see Chart 2).
Chart 2: Chart 2: As a shareholder, what statement most closely aligns with your view on how
traditional financial institutions should allocate investment spending on innovation?
80%
70%
60%
50%
40%
30%
20%
10%
0%
26%
Investment spending on
innovation should be top
priority
68%
6%
Given the revenue Institutions should focus on
environment, institutions should improving the bottom line and
invest in innovation projects but delay innovation projects
be mindful of self-funding
Source: BofA Merrill Lynch Global Research
2 2016 Future of Financials Conference | 17 November 2016
Banks Takeaways
With our conference coming a week following a historic US presidential election that
helped boost bank stocks by 12%, bank management teams were generally optimistic
with regards to the economic outlook heading into 2017. Greater fiscal stimulus that is
expected to spur economic growth coupled with potential regulatory relief has helped
improve the overall sentiment in the sector. When asked what the biggest impact of the
GOP sweep would likely be to bank earnings, 35% noted tax cuts and infrastructure
spurring growth as the biggest impact.
Chart 3: What do you think is the biggest impact of the GOP sweep to bank earnings?
40%
35%
30%
25%
20%
15%
10%
5%
0%
24%
Interest rates rising
faster across the curve
due to stronger dollar
35%
Tax cuts and
infrastructure spending
spurring growth,
therefore better loan
demand
31%
Lower regulatory
burden, driving higher
ROEs as excess
capital is returned
back to shareholders or
reinvested for growth
9%
No real impact/too
early to tell
Source: BofA Merrill Lynch Global Research
An area that has attracted particular attention among bank investors is around the
current landscape of multifamily lending. We polled the audience around their outlook
for multifamily lending in 2017 and found that 49% of those polled said there was some
concern, but only in certain regions and at certain rental price points. Meanwhile, 29%
noted softening fundamentals that should lead to slower financing activity and
worsening credit metrics (see Chart 4).
Chart 4: How do you view fundamentals for multifamily lending in 2017?
60%
50%
40%
30%
20%
10%
0%
10%
Softening
fundamentals
should lead to
slower financing
activity next year
2%
Softening
fundamentals
should lead to
worsening credit
metrics
29%
Softening
fundamentals
should lead to
slower financing
activity and
worsening credit
metrics
49%
Some concern, but
only in certain
regions and at
certain rental price
points
11%
No concern
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 3
Brokers Takeaways
In brokers, GS presented, while MS hosted 1-1 meetings with investors. During the
conference we polled the audience on several topics including the outlook for capital
markets revenues.
Investors modestly positive on capital markets over next 1-2 years
Given the election outcome, recent rise in rates, potential for higher growth and deregulation,
and lower corporate tax rates, we asked investors about their outlook for
capital markets over the next 1-2 years. The majority of investors (78%) were positive
about the capital markets sector, with 56% who expect modest improvement in
regulation, revenue growth of 5-10%, and returns of 10-12% and 22% who think we
could see significant improvement in regulation, revenues growth of 10%+, and returns
12%+.
Chart 5: Based on the backdrop and the election outcome, what is your outlook for the capital
markets over the next 1-2 years
60%
56%
50%
40%
30%
20%
10%
9%
13%
22%
0%
Little to no change in
regulation, flattish
revenues, and stable
returns
Little to no change in
regulation, but
improving revenues
(5%) and returns
(10%+) with GDP
growth
Modest improvement in
regulation, revenues
(5-10%), and returns
(10-12%)
Significant
improvement in
regulation, revenues
(10%+), and returns
(12%+)
Source: BofA Merrill Lynch Global Research
Asset Manager Takeaways
In asset management, four of the largest public managers, IVZ, EV, LM, and AB either
presented or engaged in fireside chats, while several other firms including AMG, APAM,
BLK, CNS, OMAM, and VRTS hosted 1-1 meetings with investors. During the conference
we polled the audience on several topics including the outlook for DOL (in the panel
section), the outlook for fixed income given the recent rise in rates/expected rate hike
and outlook, active vs passive market share, M&A, and pricing/fee structures.
Fixed income outlook more muted
Given the recent rise in rates, a looming rate hike in December, and the potential for a
higher growth/inflation outlook for the economy, we asked investors their outlook on
fixed income performance and flows vs equities. The majority of investors believe we
will see weaker fixed income performance and flows offset by stronger equity
performance and flows (52%). Weaker fixed income/equity performance and flows was
the second most popular answer at 24% while flat flows and performance came in third
at 16%. Only 8% of the audience think we will see stronger fixed income/equity
performance and flows, while nobody thinks fixed income will be stronger and equity
will be weaker (both flows and performance).
4 2016 Future of Financials Conference | 17 November 2016
Chart 6: What is your outlook on fixed income performance and flows versus equities?
60%
50%
52%
40%
30%
24%
20%
16%
10%
8%
0%
Weaker FI performance
& flows / Stronger
equity performance &
flows
Weaker FI and Equity
performance & flows
Flat FI performance &
flows / Flat equity
performance & flows
Stronger FI and Equity
performance & flows
0%
Stronger FI
performance & flows /
Weaker equity
performance & flows
Source: BofA Merrill Lynch Global Research
Active vs passive outlook – passive to continue to gain share
Given the ongoing shift to passive investing from active, we polled the audience to see
where they think the share split between the two styles eventually settles. Currently the
share split is roughly 70% active and 30% passive which was the least popular answer
(10%) when asked “do you see improving cyclical demand for active management,
despite structural headwinds, and if so where do you think active/passive share settles?”
Most investors do see improving cyclical demand for active management and think
passive will eventually control 40% of the market (50%) while 40% of respondents do
not see improving trends for active and that passive will eventually capture 50% of the
market.
Chart 7: Do you see improving demand for active & where do you think active/passive share settles?
60%
50%
40%
30%
20%
10%
0%
Yes, but structural will persist, with
share heading to 60% active / 40%
passive
No, and structural will persist, with share
heading to 50% active / 50% passive
Yes, with the share settling near the
current 70% active / 30% passive
Source: BofA Merrill Lynch Global Research
M&A activity likely to rise
Given a recent pickup in M&A and pressures within the industry that will likely continue
the trend, including rising regulatory costs, some fee pressure, and active outflows, we
asked investors their outlook for M&A in the sector. We found that the majority think
2016 Future of Financials Conference | 17 November 2016 5
that the number of deals in the asset management sector will increase modestly in
2017 vs 2016 (56%), 32% see M&A picking up significantly, and 12% see flat activity in
2017. Nobody sees lower M&A activity in 2017 vs 2016.
Chart 8: How will 2017 asset management M&A activity (# of deals) be versus 2016?
60%
56%
50%
40%
30%
32%
20%
10%
12%
0%
Increase modestly
Increase
significantly
Be stagnant
0% 0%
Decrease
modestly
Decrease
significantly
Source: BofA Merrill Lynch Global Research
Pricing/fee structure in retail seems to have more of a following
Given some underperformance of active managers, some scrutiny around fees, as well
as fee pressure from passive, we asked investors if they thought a change in active
pricing could make sense, i.e. charge a lower base fee with a variable performance fee
that would be earned when alpha is generated. We found a majority of respondents
thought it would make sense to change the pricing structure and it could make active
more competitive vs passive (67%). The rest of respondents felt it didn’t make sense
either because it would be too challenging for the active industry or it would not slow
the flows into passive.
Chart 9: Do you think a change in industry active pricing (lower base + perf fee) could make sense?
80%
70%
67%
60%
50%
40%
30%
25%
20%
10%
8%
0%
Yes, it could make the product more
competitive vs. passive products
No, it would be too challenging for the
active industry
No, it would not change the flow trend
toward passive products
Source: BofA Merrill Lynch Global Research
6 2016 Future of Financials Conference | 17 November 2016
Alternative Asset Manager Takeaways
Within alternative asset management, four of the public managers, ARES, BX, CG, and
KKR presented, while the others did meetings. During the conference we polled the
audience on several key topics including the outlook for the equity and real estate
markets, potential impacts from the recent election, distribution outlook, and firm
structures and business models. Investors were generally bullish on the equity market,
potential for fiscal stimulus ahead, and a key focus from investors was on the potential
change in taxes following the election, and whether that means reassessing corporate
structures for the alts, with a possible change from PTP to C-corp.
Investors bullish on the equity markets
Our polling results indicate that investors are generally positive on equity market returns
over the next year. When asked “What is your expectation for equity market returns over
the next year?” the most common response was +0-10% (51%), followed by 10%+
(25%), 0 to -10% (15%), and <-10% (8%).
Chart 10: What is your expectation for equity market returns over the next year?
60%
50%
51%
40%
30%
25%
20%
15%
10%
8%
0%
10%+ 0 to +10% 0 to -10% More than a 10%
pullback
Source: BofA Merrill Lynch Global Research
Investors are less positive on the real estate market
When asked “Where do you think we are in the overall Real Estate cycle?” most people
think that we are in the middle innings with a few pockets of concern (57%), followed
closely by later innings with growing areas of concern (42%). Very few people think that
we are in the early innings of the real estate cycle (1%).
2016 Future of Financials Conference | 17 November 2016 7
Chart 11: Where do you think we are in the overall Real Estate cycle?
60%
57%
50%
40%
42%
30%
20%
10%
0%
1%
Early innings with limited areas
of concern
Middle innings with a few
pockets of concern
Late innings with growing areas
of concern
Source: BofA Merrill Lynch Global Research
Investors like the growth, superior performance, & distributions
When asked “What is the most attractive aspect of investing in an alternative asset
manager?” investors like both attractive growth & superior performance and high
dividends/distributions (both at 35%). Investors also like the long term locked up capital
(18%), while low valuations and wide moats were less important (both at 6%).
Chart 12: What is the most attractive aspect of investing in an alternative asset manager?
40%
35%
35% 35%
30%
25%
20%
18%
15%
10%
5%
6%
6%
0%
Attractive organic
growth & superior
performance
High
dividends/distributions
for shareholders
Wide moats for
established firms
Long term locked up
capital
Low valuations
Source: BofA Merrill Lynch Global Research
Despite moderating distributions of late, most expect flat to higher in ‘17
When asked “Where do you think distributions for the industry will be in 2017 vs.
2016?” investors expect roughly flat or up 5-15% (both at 37%), followed by down 5-
15% (21%). Few investors expect distributions to change more than 15% year-overyear.
8 2016 Future of Financials Conference | 17 November 2016
Chart 13: Where do you think distributions for the industry will be in 2017 vs. 2016?
40%
37% 37%
35%
30%
25%
20%
21%
15%
10%
5%
0%
0%
Roughly flat Up 5-15% Up 15%+ Down 5-15% Down 15%+
5%
Source: BofA Merrill Lynch Global Research
Election results could have far reaching impacts for the sector
When asked “What is the most likely impact from the election results on the alternative
asset managers?” investors were fairly mixed in their responses, indicating to us that
investors expect a number of changes. The most common response was increased tax
on carried interest (33%), followed by higher rates impacting financing costs and some
returns (27%), then stronger economic growth and healthy returns (20%). Few investors
expect a decrease in bank regulation slowing alternative manager growth in new areas
(13%) along with too much euphoria leading to a market correction (7%).
Chart 14: What is the most likely impact from the election results on the alternative asset managers?
40%
35%
30%
25%
20%
15%
10%
5%
0%
20%
33%
Stronger economic Increased tax rate
growth and on carried interest
healthy returns for
the alternative
managers
27%
Higher rates
impacting
financing costs
and some returns
13%
Decreased bank
regulation
potentially slowing
growth in new
areas
7%
Too much
euphoria leading
to a market
correction and
deployment
opportunities
Source: BofA Merrill Lynch Global Research
Specialty / Consumer finance Takeaways
Companies were generally bullish on the US consumer heading into 2017. AXP
presented a fairly upbeat outlook on billings, loan and revenue growth, while cautioning
that Discount rate pressures and FX headwinds could impact near-term results. The
2016 Future of Financials Conference | 17 November 2016 9
private tech based lenders were cautiously optimistic that hiccups from earlier this year
were behind the sector, while the private payments companies stressed the importance
of partnering with incumbent leaders and the need to maintain safety standards.
US Banks Top Takeaways
Associated Bancorp (ASB) B-3-7, Underperform
• A strong Midwest market should lead to steady growth: ASB’s CEO Phillip Flynn
and CFO Chris Niles highlighted the strong fundamentals of the bank’s Midwest
footprint with its low unemployment and a strong manufacturing base. While
commenting on the potential for relief coming out of DC under the new Trump
administration, management noted that shortage of skilled workers was probably
the biggest issue impeding businesses in its footprint versus higher taxes or an
overly stringent regulatory environment.
• CRE represents a growth opportunity: Management was positive on growth
prospects within the CRE loan portfolio, which represents 24% of avg loans as of
3Q16. Management is targeting CRE to represent 30-40% of the portfolio in order
for consumer, CRE, and commercial to each comprise approximately a third of the
loan book. In the near term, executives see opportunities in the CRE space in 2017
as pricing and structure improve benefitting from a pullback by lenders with high
CRE concentration.
• Energy portfolio should begin to stabilize: While management analyzes the
energy book on a credit by credit basis, it noted caution if oil prices fell
significantly. However, management noted that the energy book reflects lower
energy prices as new energy loans price in lower hydrocarbon pricing vs. the
maturing loans. Regarding energy loan growth, management expects muted growth
going forward as the benefit from new loans will most likely be offset by continued
pay-downs by existing customers.
• Dec rate hike to surface in 1Q17 margin: Management expects a Dec rate hike to
have little impact on 4Q given that its LIBOR based portfolio would re-price on Jan
1. On the other hand, interest expense is expected to rise as deposits that are
linked to benchmark rates re-price higher. Last year, the margin fell 1bp QoQ
following the Fed rate hike as deposit costs rose 8bp QoQ. Management noted that
1Q16 saw lower loan renewal rates and compression from cost of funds, but that
its cost of funds are in a better position this year, which should help lead to a
modest positive impact to the margin in 1Q17 from a Dec rate hike.
• Fee businesses could get augmented by additional M&A: Within fees,
management views insurance as the best opportunity from non-bank M&A. Recall
that ASB completed the acquisition of Ahmann & Martin in 02/15. Management
noted that it saw a significant opportunity from providing consulting services
around employee benefits to small-to-medium sized businesses. Moreover, any
changes to the Affordable Care Act that creates added uncertainty in the market
would present an incremental revenue growth opportunity for this business.
10 2016 Future of Financials Conference | 17 November 2016
Chart 15: Would you want to see ASB partner with emerging online lenders to augment organic
growth?
70%
60%
50%
40%
30%
20%
10%
0%
Yes, partnership with online lenders provides a
good source of loan growth
No, given the uncertainty around how these
loans will perform during a credit downturn
Source: BofA Merrill Lynch Global Research
BB&T (BBT), B-1-7, Buy
• Pent up demand in small and middle market corporates. COO Chris Henson was
upbeat with regards to the growth outlook for the US economy post the US
elections, particularly from middle market companies that have been extremely
cautious around making investments over the last few years. Mr Henson noted that
as business confidence rises on back of potentially stronger job growth and lower
tax reductions, BBT should see strength across its core banking operations.
• Out of M&A in the near term but looking to grow long term. Management
reiterated that it is out of the M&A game for now as it looks to execute on
delivering its targeted synergies from recent deals. That said, management expects
to eventually engage in M&A deals with BBT having the infrastructure for double its
size, noting that scale has become important in the current regulatory landscape.
When asked where investors would like BBT to focus on doing deals, 59% noted
that it would like management to pursue fee related businesses while 23% would
like management to prioritize dividend maximization.
Chart 16: Do you expect the deal activity in financial services to pick up
in 2017?
Chart 17: Once M&A is back on the table, where would you like to see
BBT focus on doing deals?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
87%
Yes
13%
No
70%
60%
50%
40%
30%
20%
10%
0%
18%
Depository deals
59%
Fee-related
businesses
23%
Would rather they
prioritize maximizing
the dividend
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
• Well positioned from rising rates. Given the outlook for higher interest rates on
both the short and long end of the curve, Mr. Henson noted that while BBT tries to
maintain a relatively neutral balance sheet, it would expect to see upside in the
margin on back of higher rates. Additionally, higher long rates could also help drive
2016 Future of Financials Conference | 17 November 2016 11
lower pension expense as it reduces the overall discounted pension liability given
that BBT remains one of the few large regional banks that still have defined benefit
pension plans.
• Potential for regulatory relief requires BBT to reevaluate risk/compliance
spending. Management noted that 75-80% of its infrastructure budget is based
around risk management and regulatory costs. Given the possibility of regulatory
relief coming out of the new administration, management noted that it does not
want to misallocate its expense spending. As such, management expects to
redeploy some of those compliance related costs into revenue and service
generation opportunities stemming from any regulatory relief.
• Branches still have value, but the structure will likely change. Mr. Henson noted
that he still sees value from BBT’s branch network but increasing customer usage
across its digital channels and with branch transactions down 4%, he expects
continued branch consolidation at a pace of more than 2-2.5% over the next couple
years. Moreover, management believes that future branches will be likely be
smaller in nature and staffed with fewer people that are cross trained with multiple
responsibilities. As an example of this, Mr. Henson noted that BBT has combined its
teller and relationship banking role into one branch banker role.
Chart 18: What do you think is the biggest catalyst for BBT shares over the next 12-24 months?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
30%
Successful
integration of its
recent deals and
achieving synergy
targets
41%
Strong top-line
organic revenue
growth, regardless
of macro backdrop
11%
Expense
rationalization
15%
Accretive bank
and/or non-bank
deals
4%
Continued
outperformance in
dividend growth
and dividend yield
Source: BofA Merrill Lynch Global Research
Bank of Hawaii (BOH), B-3-7, Underperform
• Solid loan growth on back of a strong HI economy. Chairman, President and CEO
Peter Ho, Vice Chairman and CFO Kent Lucien and Senior Executive VP, Controller
and Principal Accounting Officer Dean Shigemura were generally upbeat with
regards to the operating outlook as we enter 2017. Management guided to
achieving low double digit loan growth on the back of a robust Hawaiian economy.
While management expects some moderation in C&I growth following a strong 3Q
it sounded upbeat around the lending outlook given fairly healthy tourism activity.
Management noted that while a de-emphasis on the Pacific Alliance, a priority for
the Obama administration, was not a positive development, it remained fairly
confident that strong military spending should continue to serve as a tailwind to the
Hawaiian economy.
• Credit outlook remains benign. Mr. Ho affirmed the credit environment has been
benign and believes BOH’s strong credit will remain intact in the near future. As
loan growth improves, Mr. Ho acknowledged provisions should follow a similar
trend, but nothing on the horizon suggests credit will worsen anytime soon.
Management acknowledged reserve balances are hard to predict, but believes the
12 2016 Future of Financials Conference | 17 November 2016
greatest likelihood is for the loan loss reserve ratio is to stabilize near current
levels.
• Remains asset sensitive. Management acknowledged positive trends coming out
of a future Trump administration, with one being the positive benefit from higher
rates. With a December rate hike likely on the horizon, CFO Kent Lucien reminded
investors that a 25 bp rate increase would benefit NII marginally ($1.5mn on an
annual basis), but as the 10yr continues to rally, spread income will benefit more
significantly. A 100 bp increase contributes to a 5.2% increase in NII on an annual
basis.
• Continued focus on expenses. Management expects expenses to come in at the
upper end of their 3% to 3.5% guidance this year, mainly due to performance based
expenses such as stock based comp and commissions. A potential source of
expense savings should be reduction in the size of its branches, not necessarily
overall count. While management has piloted this new branch design it believes that
converting the entire branch network will be a multiyear process.
• Capital deployment remains a priority. BOH continues to provide great
transparency in regards to their capital deployment strategy. Management
reiterated their commitment to payout 50% of net income in the form of dividends,
with a remaining portion going to buybacks. BOH has completed over $400mn in
buybacks over the past five years and noted that they are very comfortable with
this strategy, given its proven track record.
Chart 19: What do you see as the biggest headwind to BOH’s 2017 EPS growth outlook?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
20%
Normalizing credit
provisioning costs?
40% 40%
Slowing loan growth
following a strong 2016
Pressure on expense
growth
0%
Pressure on the net
interest margin
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 13
Chart 20: With regard to capital deployment, what would you like management to focus on?
70%
60%
57%
50%
40%
30%
29%
20%
14%
10%
0%
Increase dividend payout
Increase the pace of share
buybacks
Continue with current capital
management strategy
Source: BofA Merrill Lynch Global Research
Capital Bank Financial (CBF), C-1-7, Buy
• Investor expectations for CBF to achieve its ROA target increased YoY. Of the
audience polled, 75% believe CBF to achieve its 1.1% ROA by YE17. This compares
to 67% of the audience polled last year. CEO Gene Taylor highlighted both the
organic growth opportunities and limited expense growth for the bank to achieve
its ROA target. Although the bank is expected to cross $10bn in assets next year,
management sounded confident that there would be little incremental expense
growth as the bank has already built out leverageable systems.
Chart 21: What do you consider as the single most important catalyst
for CBF shares in 2017?
60%
50%
40%
30%
20%
10%
0%
50%
Achieving its
profitability
targets
42%
A bank
acquisition
Source: BofA Merrill Lynch Global Research
0% 0%
Acceleration
in loan
growth
8%
Increasing Higher
capital returninterest rates
Chart 22: Do you think CBF will achieve its 1.1% core ROA target by
YE17?
80%
70%
60%
50%
40%
30%
20%
10%
0%
75%
Yes
Source: BofA Merrill Lynch Global Research
25%
No
• Expectations around COB merger remain intact. CBF reiterated their
expectations to fully recognize the 39% of cost savings related to the
CommunityOne merger by 2017 year-end. (Systems conversion is slated for mid-
1Q17, with initial savings expected to be realized starting 2Q17). During their
presentation, management introduced the source of these savings (new disclosure),
with the majority expected to come from executive management compensation
(23%) and back-office functions (33%).
• Capital deployment remains a key catalyst for the stock. Management agreed
with the 80% of the audience polled that believe the pace of M&A activity will pick
YoY (slightly better than last year’s forward expectations). While management noted
that it remains focused on integrating COB, and acknowledged that it remains
14 2016 Future of Financials Conference | 17 November 2016
active in terms of M&A discussions, CBF continues to evaluate all opportunities
that promise the best returns for shareholders. Interestingly, investor sentiment
around CBF’s positioning within the M&A market shifted, 75% of respondents
believing the pro forma institution is better positioned to act as an acquirer. (Note
last year, 55% of respondents believed CBF would be a takeout candidate in the
medium term.
Chart 23: Do you think the pace of M&A activity will pick-up significantly
in 2017 vs. 2016?
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
80%
Yes
Source: BofA Merrill Lynch Global Research
20%
No
Chart 24: Does the acquisition of CommunityOne better position CBF as
an acquirer or a takeout candidate?
80%
70%
60%
50%
40%
30%
20%
10%
0%
75%
Acquirer
Source: BofA Merrill Lynch Global Research
25%
Takeout candidate
• CBF expected to prudently grow in CRE as bank is underpenetrated. CFO Chris
Marshall acknowledged that there exist signs of frothiness within the multi-family
lending segment. That said, he noted there is still room to grow as peers pull back
in response to regulatory oversight (3Q: 161% vs. 300% threshold). That said,
management remains selective and has implemented a 25-30% concentration limit
(3Q: 22%).
Citigroup (C), B-1-7, Buy
• Markets revenue up YoY so far, down from robust 3Q. President and CEO of ICG
Jamie Forese and CFO John Gerspach noted that at this current point in time, they
expect a seasonal sequential decline in Markets revenue in 4Q, but revenues should
be up YoY on back of stronger activity levels post the election. Moreover, banking
activity is looking consistent with prior quarters.
• DTA impact from lower tax rates. Given the possibility of lower tax rates under
the new administration, there have been many questions around what a potential
tax cut could mean on C’s ability to re-capture some of its DTA. Management noted
that the impact will depend on 1) the ultimate tax rate, 2) either a worldwide or
territorial regime, and 3) the time it takes to reflect the new changes. A federal tax
cut would directly impact the $21B timing related differences component of its
DTA balance. Assuming a 20% decline in the federal tax rate, this would imply a
$4B charge to the P&L (20% X $21B). That said, C has $7B of timing difference
DTA that is not includable in its regulatory capital. As a result, that $4B impact
would not have an impact on its CET1. In the event that there is a territorial regime,
there is an element in its foreign subs equal to ~30% of the $21B that would lose
its value at an accelerated rate. Assuming a 25% tax rate and territorial regime,
management noted that there would be roughly $12B worth of DTA that would see
some valuation adjustment and drive a $4B of reduction in its regulatory capital.
• Aiming to improve market share in Equities. Management noted that C currently
ranks around 8-9th in the Equities business and while it is not looking to achieve a
top 3 market share, it would like to improve to around 5-6th. Management noted
that the revenue gap to reaching that ranking is ~$1B. While not all of that is
2016 Future of Financials Conference | 17 November 2016 15
expected to fall to the bottom line, management noted that achieving this would be
accretive to its overall margin. We note that when asked where is C’s biggest
opportunity to take global market share within ICG, 47% of those polled said the
biggest opportunity lied within the Equities business.
Chart 25: Where do you think C’s biggest opportunity is to take global market share within its IGC
business?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: BofA Merrill Lynch Global Research
• Lower regulatory constraints versus peers present opportunity. Given C’s strong
regulatory position such as its above peer SLR ratio, management noted that it can
compete in balance sheet intensive businesses such as Rates while more
constrained peers are forced to pull back. In terms of its ability to take market share
away from European banks, management noted that European banks are more likely
to cede share in Fixed Income and less so within Equity and Banking.
• Longer term goal of 14% ROTCE in ICG. Management believes that under a more
normalized rate environment and through its work towards improving efficiencies
across ICG on back of its infrastructure refinements, ICG should be able to achieve a
14% ROTCE vs ~12% today.
Chart 26: Despite material progress, C shares still trade below TBV. What will drive shares to re-rate
closer to TBV?
40%
35%
30%
25%
20%
15%
10%
5%
0%
31%
Source: BofA Merrill Lynch Global Research
47%
22%
Fixed income markets Equity markets Banking (Treasury & Trade
Solutions, advisory, ECM,
DCM)
34%
Continued
increase in capital
return from the
$10.4B expected
return under the
2016 CCAR cycle
37%
Consistent
improvement in
revenue
momentum
12%
Continued core
cost control, with
further reductions
in legal &
repositioning
charges
10%
Accelerated recapture
of its
deferred tax asset
(DTA)
7%
Further
simplification of its
global business
model
16 2016 Future of Financials Conference | 17 November 2016
Chart 27: Where do you see Citicorp’s efficiency ratio settling in 2017?
80%
70%
71%
60%
50%
40%
30%
20%
10%
21%
9%
0%
Below the 58% reported YTD in
‘16
In-line with the 58% reported
YTD in ‘16
Above the 58% reported YTD
in ‘16
Source: BofA Merrill Lynch Global Research
East West Bancorp (EWBC), B-1-7, Buy
• Sentiment post-election appears constructive on regulatory relief. CEO
Dominick Ng noted that the industry could be positively impacted should aspects of
Dodd-Frank, which have been both challenging and taken up significant internal
resources (even for banks below the $50bn SIFI asset threshold), be reformed.
Specifically, Mr. Ng believes the pace of expense growth could likely slow. That said,
he noted the possibility to shift some of these expense savings to revenue
generating areas.
• EWBC sees limited impact from anti trade rhetoric during the run-up to the US
elections. Although recent political rhetoric on China has had a negative bias, Mr.
Ng believes these views are primarily focused on the traditional-manufacturing
Chinese industries vs. the country’s current strategic emphasis on tech and
consumer/retail. Despite having only a 4% exposure to Greater China (includes Hong
Kong), EWBC benefits from its unique positioning, both as industry experts in
parallel industries and as a relationship bank. Investor sentiment agreed; with 86%
of the audience polled have a bullish view of EWBC’s China exposure.
Chart 28: How does China exposure impact your investment thesis on EWBC?
50%
43%
43%
40%
30%
20%
14%
10%
0%
Makes me cautious,
especially given the
anti-trade rhetoric in
the run-up to the US
elections
Makes me bullish, as
China provides an
attractive growth
opportunity
0%
Makes me cautious,
given a slowing
Chinese economy
Does not matter much,
given EWBC’s earnings
are far more levered to
the US economy
Source: BofA Merrill Lynch Global Research
• EWBC reiterated its strategy to sell CRE loans in favor of portfolio
diversification. Although Mr. Ng expressed caution on the overall commercial real
estate (CRE) market, he noted seeing little tangible signs of concern within EWBC’s
footprint. That said, EWBC could continue to look to sell CRE loans in order to keep
the loan portfolio balanced and thereby limit the reliance on any one segment. Note:
CRE concentration was 261% of risk-based capital as of 3Q vs. 265% in 2Q.
2016 Future of Financials Conference | 17 November 2016 17
• EWBC to maintain capital for organic growth opportunities. As of 3Q, EWBC’s
CET1 ratio was 10.9%. While EWBC isn’t opposed to using excess capital for an
acquisition (depending on the market landscape), Mr. Ng prefers to use capital to
support organic growth opportunities and the dividend (1.75% div yield). With
respect to share repurchase, EWBC seemed less enthusiastic to buy back stock at
current valuation levels (2.3x TBV).
First Hawaiian (FHB), C-2-7, Neutral
• Positive outlook around the Hawaiian economy. Chairman and CEO Robert
Harrison and CFO/Treasurer Michael Ching were optimistic with regards to the
outlook for the Hawaiian economy, particularly around tourism trends. While the
recent strength of the dollar could impact the inflow of foreign tourists (with Japan
and Canada the key foreign markets for HI) to the island, management noted that
the potential for an increases in domestic tourism could help offset the pressure
from any slowdown due to a stronger USD.
• Positioned well for higher rates. With regards to its outlook on the impact of
potentially higher interest rates, management noted that it remains asset sensitive
with 60% of its loan portfolio floating rate. On the funding side FHB expects the
deposit beta to remain low given the competitive dynamics in the Hawaii landscape.
Management anticipates that another 25bp increase in the Fed Funds rate in
December could have a similar impact on the NIM (+6bp) as it experienced
following the previous rate hike in Dec '15.
• Cash deployment to securities completed. Management noted that it has
completed the liquidity actions that it planned to take from deploying excess cash
into its securities portfolio and the full impact of this should be visible in 4Q
results. Note the securities portfolio duration is 3.3yrs at the end of 3Q16.
Management noted that it prefers to keep $400-500mn at the Fed in cash liquidity.
• Continued focus on maintaining dividend payout. In terms of capital
management, management reiterated that it would like to maintain a healthy
dividend payout. Given that additional capital return from buybacks are limited due
to the Fed’s CCAR process (which FHB is subject to given that it is part of a larger
holding company owned by BNP), management intends to increase its capital
payout to shareholders (via higher dividend and buybacks) over time.
Expenses to stay relatively elevated in near term. During the audience poll, when
asked about what management should prioritize in 2017, 38% of the investors
polled noted that they would like management to manage core expense growth
while 31% would like management to increase the dividend payout to over 50% of
earnings. Management noted that the efficiency ratio would likely trend around
50%, modestly higher than the 48.5% it reported in 3Q as it incurs additional public
company costs ($14.5 – 17mn of expenses), but over time should move back below
in the mid-to-high 40s.
18 2016 Future of Financials Conference | 17 November 2016
Chart 29: What is the single biggest factor that would prevent you from buying or increasing
exposure to FHB?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
40%
27%
FHB’s premium valuation Exposure to the auto sector Liquidity overhang tied to a
single large shareholder (BNP
owns 82% of shares o/s)
33%
Source: BofA Merrill Lynch Global Research
Chart 30: What would you like management to prioritize in 2017?
40%
35%
30%
25%
20%
15%
10%
5%
0%
38%
Managing core
expense growth to
under 2.5%
31%
25%
Increase its dividend Initiate a stock buyback
payout to over 50% of program
earnings
6%
Pursue M&A
opportunities
Source: BofA Merrill Lynch Global Research
Great Western Bancorp (GWB), B-1-7, Buy
• GWB sees three potential benefits following the US presidential election
results. Chief Financial Officer Peter Chapman sounded optimistic that clarity
around the corporate tax policy could act as a much needed impetus to spur lending
activity. Secondly, current prospects for Head of Ag under the new administration
are viewed as a net positive for the industry. Lastly, while GWB has already begun
to see regulatory costs increase now that they’ve exceeded $10bn in assets,
management could see a potential for compliance costs to rationalize should the
new administration reform the regulatory framework.
• Management’s revised growth rate outlook was meant to level set
expectations. During its 3Q16 earnings call, management tempered loan growth
expectations slightly to “mid-single” digits for FY16 vs. “mid-to-high” single digits.
Interestingly, this was the number one reason among investors polled as to why
they were hesitant to increase their exposure to GWB. That said, management
sounded optimistic about the growth opportunities within its AZ and CO markets.
While growth in C&I should see continued momentum, management noted
increased competition around pricing as banks tapped out of the CRE markets look
to make C&I loans. On CRE, GWB sees itself as a potential beneficiary from pullback
by some of its competitors. While management was generally constructive of the
2016 Future of Financials Conference | 17 November 2016 19
CRE market across its footprint it noted some caution around the health of the
market in Denver.
Chart 31: What is the primary reason keeping you from buying/increasing exposure in GWB?
40%
38%
38%
35%
30%
25%
25%
20%
15%
10%
5%
0%
Ag exposure, as the weakness Stock valuation, see better Cautious commentary around
in the farm sector increases risk/reward elsewhere loan growth during 3Q16
credit risk
earnings
Source: BofA Merrill Lynch Global Research
• Ag portfolio offers unique opportunity, but management believes fears
overstated. As of 3Q16, ag loans represented 25% of the total portfolio (36% in
grains, 50% in proteins and 14% in other). Tied for first at 38% as a reason why
investors are hesitant to increase exposure to GWB resonates from the bank’s ag
exposure. While lower grain prices may constrain cash flow on those loans nearterm,
Mr. Chapman noted that this is offset by stronger yields. Management also
highlighted the relatively low losses observed historically in this portfolio given the
significant experience within GWB's management ranks in lending to this segment,
including in the 1980s the last stress period for the farm sector. That said,
management remains committed to this business as it is key to GWB’s footprint.
• Management reiterated its commitment to actively manage excess capital.
Although management is comfortable with its current capital levels (3Q: 9.5% tier 1
leverage), Mr. Chapman noted the bank’s preference is to put its excess capital to
work. Management reminded investors of the criteria it looks for in a potential
target. While they continue to look for opportunities within their footprint,
specifically IA and KS, they remain disciplined. In addition to its recently authorized
repurchase program of $100mn, management believes a total payout ratio of 30%
is maintainable.
IBERIABANK (IBKC), B-1-7, Buy
• Focused on moving closer to its strategic targets: President and CEO Daryl Byrd
and Senior Vice President John Davis were upbeat around the outlook for economic
growth across IBKC's 10 state footprint as the bank looks out into 2017. While
management has thus far not provided any specific guidance for 2017, we expect
this to be forthcoming in conjunction with the announcement of 4Q16 results in
January. Moreover, management sounded cautiously optimistic that pro-growth
policies (if implemented) coupled with some relief on the regulatory front under the
new Trump administration could lead to a much stronger growth outlook
• Energy credit costs should trend lower: Management noted the overall energy
portfolio should continue to trend lower but is expected to moderate as run-off in
stressed energy loans (and loan payoffs) are partially offset by new energy loans,
with management looking to selectively lend again in the sector. Moreover, with
energy criticized loans peaking in 1Q16, management expects the criticized loans to
trend lower barring any major declines in oil prices.
20 2016 Future of Financials Conference | 17 November 2016
• Ready for M&A: While a depressed valuation (due to the volatility surrounding oil
prices) had kept IBKC out of M&A, given the recovery in valuation it noted its desire
to pursue potential deals across its footprint. Management also noted that while
the recent move in equity markets had pushed up valuations for potential publicly
traded sellers, it sees significant opportunity among the privately held banks that
may look for a merger partner to gain liquidity and monetize the improving
sentiment surrounding bank stocks. From a size standpoint, management did not
rule out larger deals. This is not surprising given that IBKC has not shied away from
pursuing relatively large sized deals previously.
• Rate increase to boost the margin: In terms of its interest rate sensitivity,
management noted that it retains an asset sensitive balance sheet, with a potential
25 basis point move in the Fed Funds rate expected to add 5c to quarterly EPS.
That said, management recognized that slower mortgage activity due to rising long
rates could temper the revenue outlook for its mortgage business.
Chart 32: What is the biggest factor that prevents you from owning or adding exposure to IBKC?
60%
50%
50%
40%
30%
20%
20%
30%
10%
0%
Energy exposure
Potential that the bank will
enter into a large M&A deal
Valuation, see better
risk/reward elsewhere
Source: BofA Merrill Lynch Global Research
JPMorgan Chase & Co (JPM), B-1-7, Buy
• Pent up demand from macro uncertainty offers growth opportunity. Doug
Pento, CEO of JPM’s Commercial Bank, sounded optimistic around the opportunity
within commercial banking from the pent-up demand in the market that was
constrained by the uncertainty surrounding the election. In addition, he highlighted
the increased opportunity generated by JPM’s expansion into 44 new markets since
2008, specifically in LA. This coincides with 62% of the audience polled who believe
top-line revenue growth is most important for the stock to continue its
outperformance.
2016 Future of Financials Conference | 17 November 2016 21
Chart 33: As a current or prospective JPM shareholder, what do you think is most important for the
stock to continue its outperformance next year?
70%
60%
50%
40%
30%
20%
10%
0%
62%
Top-line revenue
growth
0%
Continued
expense
management
14%
Positive shift in the
interest rate
backdrop
10%
Accelerating
capital return
14%
More clarity on
regulatory and/or
litigation issues
facing the industry
Source: BofA Merrill Lynch Global Research
• JPM cautious on CRE; however, overall credit remains benign. Forty-eight (48%)
percent of the audience polled believe concerns around multi-family fundamentals
will be concentrated in certain regions. Although credit for the overall bank remains
benign, Mr. Petno believes we are in the later stages of the real estate cycle and
expressed a cautious tone on the high-end condo/construction market. That said,
JPM is primarily exposed to more stable, multi-family credit (i.e. rent-controlled
apartments) where the average loan to value is 60%.
Chart 34: How do you view fundamentals for multifamily lending in 2017?
60%
50%
40%
30%
20%
10%
0%
6%
Softening
fundamentals
should lead to
slower financing
activity next year
3%
Softening
fundamentals
should lead to
worsening credit
metrics
35%
Softening
fundamentals
should lead to
slower financing
activity and
worsening credit
metrics
48%
Some concern, but
only in certain
regions and at
certain rental price
points
6%
No concern
Source: BofA Merrill Lynch Global Research
• With tech/digital intellectual property at fingertips, capabilities within CB are
on horizon. Mr. Pento expressed his intention to leverage the technology that the
Investment Bank has and the investments that the Consumer Bank has to build the
right digital and mobile platforms for the bank’s commercial clients. He noted that
they have the largest investment and digital budgets ever this year and expect it to
increase next year.
New York Community Bancorp (NYCB) C-1-8, Buy
• Completion of Astoria acquisition best outcome for both banks: Following the
recent announcement of a regulatory delay in getting approval for the Astoria
acquisition, NYCB CEO Joe Ficalora and CFO Thomas Cangemi reiterated that
closing the Astoria deal represents the best outcome for both banks. Beyond that
management was limited in its ability to talk about what particular factors led to
the delay and refrained from providing a specific timeline to close the deal
assuming that the BoDs at both banks agree to extend the deal deadline beyond
22 2016 Future of Financials Conference | 17 November 2016
YE16. Management was quite clear that the bank was unlikely to cross the $50bn
SIFI asset threshold on an organic basis until the SIFI threshold is moved higher,
which would take an act of Congress.
Chart 35: What is the biggest risk that prevents you from owning/increasing exposure to
NYCB?
60%
50%
40%
41%
53%
30%
20%
10%
6%
0%
Uncertainty tied with the
Astoria acquisition
Overhang from a softening in
the NYC multifamily space
Liability sensitive balance sheet
that could see pressure on the
margin from rising interest
rates
Source: BofA Merrill Lynch Global Research
• Regulatory relief would be meaningful for NYCB: Given that the prolonged
timeline for gaining regulatory approval for the Astoria acquisition can be attributed
to the pro-forma entity crossing over the $50bn SIFI asset threshold, management
noted the significant relief it would receive from legislative action that would push
this threshold higher. This would not only make the regulatory burden following the
closing of the Astoria acquisition more manageable, but would also allow NYCB to
look at additional M&A opportunities once it integrates Astoria. Moreover, any
potential relief on LCR compliance would also be welcomed by management as it
would remove a source of significant pressure on its net interest margin.
• Higher rates could accelerate refinance activity: While investors tend to view
rising rates as a headwind to refinance activity, management noted that it had
already seen a pick-up in applications as borrowers look to lock-in rates based on
the fear that rates could be significant higher 6-12 months out. As a result, this
could provide a near term boost to the margin from higher prepay income.
• Steepening yield curve leading to rising lending rates: Management noted that it
had recently increased its multifamily coupon by 0.375% to 3.50% on the improved
interest rate environment. NYCB was not alone in this rate hike as SBNY
commented that it recently moved up lending rates for its 5-year and 7-year fixed
multi-family loans. Notably, the increased lending rates are above the current book
yield of NYCB's loan book implying the potential to offset some of the potential
pressure from higher funding costs following the December rate hike.
• NYCB able to withstand downturn in multifamily market: Management was also
upbeat on its ability to withstand a downturn in the multifamily market given its
history through multiple credit cycles of outperforming on credit metrics. While it is
debatable how close we are to the next downturn, we believe that the defensibility
of NYCB's balance sheet is a key strength of the bank and should create significant
2016 Future of Financials Conference | 17 November 2016 23
organic and M&A driven growth opportunities during the next downturn. That said,
management noted that it was very likely that potential pro-growth measures taken
by the incoming Trump administration could push out any downturn, as in the short
run the economy would witness stronger growth.
Chart 36: How do you view fundamentals for multifamily lending in 2017?
60%
50%
40%
30%
20%
10%
0%
11%
Softening
fundamentals
should lead to
slower financing
activity next year
0%
Softening
fundamentals
should lead to
worsening credit
metrics
28%
Softening
fundamentals
should lead to
slower financing
activing and
worsening credit
metrics
50%
Some concern, but
only in certain
regions and at
certain rental price
points
11%
No concern
Source: BofA Merrill Lynch Global Research
Regions Financial (RF), B-2-7, Neutral
• Regions harnessing consumer to drive growth: Scott Peters, Senior EVP and
Consumer Services Group Head, Logan Pichel, Consumer Lending Group Head, and
Darren Smith, Treasurer, noted that Regions is utilizing its retail platform to drive
growth. Management highlighted strength in mortgage, card, and online lending as
avenues for growth. Importantly, management felt the US election has provided
tailwinds for Regions revenue growth prospects heading into 2017. Combined with
a better rate back drop, management sounded upbeat on its outlook.
Chart 37: What do you think is the biggest impact of the GOP sweep to bank earnings?
40%
30%
20%
10%
20%
36%
32%
12%
0%
Interest rates rising
faster across the curve
due to stronger dollar
Tax cuts and
infrastructure spending
spurring growth,
therefore better loan
demand
Lower regulatory
burden, driving higher
ROEs as excess
capital is returned
back to shareholders or
reinvested for growth
No real impact/too
early to tell
Source: BofA Merrill Lynch Global Research
• Multiple channels to drive loan growth: Management illustrated several avenues
for loan growth. Within mortgage, Regions has 450 originators that generate 95%
of its $6bn in annual originations. Management is seeking to increase its
originations from home loan direct and telephone banking to 15-20% of total
originations (currently 5% of originations) given the greater profitability from these
channels. Card growth has also been strong with active credit card growth at 12%
24 2016 Future of Financials Conference | 17 November 2016
YoY and card penetration reaching 20%. Importantly, management is utilizing online
lenders like GreenSky, a nationwide point-of-sale home improvement business, to
drive growth as balances having increased to $660mn (1% of loans) from its 2014
inception. Of note, management expects challenged growth in auto, though its
exclusive lending to the prime space limits the credit downside.
Chart 38: How do you view the impact of new online lending startups on the banking
industry?
60%
50%
40%
30%
54%
38%
20%
10%
8%
0%
A revenue growth opportunity
as banks partner with these
new players
Potential disruptors that will
likely take market share away
from traditional lenders
Online lending start ups don’t
offer anything proprietary
Source: BofA Merrill Lynch Global Research
• Possible tailwind from regulation: Management at Regions noted that while it is
still uncertain how the regulatory landscape will evolve, a more favorable
environment could allow Regions to free up investments tied to regulatory
initiatives and risk management. Management would likely direct these funds to
product development and customer initiatives.
• Asset sensitive, particularly to the long end: Regions’ executives noted its highly
asset sensitive balance sheet given the more favorable rate back drop since 3Q.
According to management, a 100bp parallel shift in the yield curve produces
~$175mn in incremental spread revenue (11% of ’17e operating income) with twothirds
of the impact coming from the middle to long end of the curve. Part of the
benefit of a rate rise is derived from lower premium amortization on its investment
portfolio from higher rates. Given the steepening of the yield curve, we expect
Regions to benefit more than peers.
• Branch network continuing to evolve: Management intends to increase the
productivity of its branches through several measures. Firstly, it is designing
smaller, more visible locations to drive traffic. Management is also implementing
the universal banker model, which has already resulted in 500 fewer tellers, in order
to increase revenues at branches. Management noted that it expects to consolidate
at the higher end of its expected 100-150 branch reductions, having already
identified 90 branches for closure.
Signature Bank (SBNY), B-1-9, Buy
• Focused on $4-6bn asset growth target: President & CEO Joe DePaolo & EVP Eric
Howell sounded fairly optimistic about the outlook for balance sheet growth with
$4bn in loan growth and $4.6bn in deposit growth YTD as of 9/30 vs. management
target for $4-6bn in annual asset growth. Management reiterated that the
fundamentals of the multifamily business (which is focused on the low-to-moderate
2016 Future of Financials Conference | 17 November 2016 25
income segment) have not changed despite the headlines surrounding a softening
in the multifamily space.
• Hiring bankers, even as team hiring on pause: On the hiring front, management
noted that although it does not expect to hire teams heading into year-end, it is
continuing to hire individual bankers (recently hired 4 to 5 lenders). Hiring will be
focused on C&I and specialty finance lenders. Management does not expect to hire
additional CRE lenders.
• Easing in regulatory environment could provide some relief on expense growth:
With regard to the potential for some easing of regulatory burden on the banks
(important here as SBNY approaches the $50bn asset threshold) under the
incoming Trump administration management noted that it could see some
abatement in expense growth associated with compliance costs. However,
management is running the business based on the current regulatory framework
and will look for more tangible signs before it makes any changes to investment
decision, especially as it relates to the compliance infrastructure.
• Lending rates reflecting the steepening in the yield curve: SBNY noted that it
had raised rates on its 5-year fixed by 0.125% to 3.5%- 3.625% and 7-year fixed up
by 0.25% to 4.0%-4.125% following the steepening in the yield curve over the last
week. We note that this was echoed by SBNY's NY rival NYCB which also noted
increasing rates on lending products in the aftermath of the move higher in interest
rates. We believe higher rates associated with new loans and better reinvestment
opportunities in the securities portfolio should serve as a tailwind to the margin
even as funding costs will likely trend higher, especially as the Fed raises interest
rates by 25bp in December.
• Regulatory scrutiny on multifamily lending manageable: With regard to the
heightened regulatory concerns surrounding CRE multifamily lending (multifamily is
50% of SBNY’s loan book), management noted that it has implemented a new loan
system likely coming on line in 3Q17 which should allow the bank to analyze the
loan portfolio at a more granular level. Management is also underwriting fewer
interest only multifamily loans in response to the regulatory concerns. Although, it
noted that it was not losing any significant business due to this as competitors had
also pulled back and borrower ability (in most instances) to service a non-interest
only loan.
26 2016 Future of Financials Conference | 17 November 2016
Chart 39: How do you view fundamentals for multifamily lending in 2017?
30%
25%
20%
15%
10%
5%
0%
13%
Softening
fundamentals
should lead to
slower financing
activity next year
7%
Softening
fundamentals
should lead to
worsening credit
metrics
Source: BofA Merrill Lynch Global Research
27% 27% 27%
Softening
fundamentals
should lead to
slower financing
activing and
worsening credit
metrics
Some concern, but
only in certain
regions and at
certain rental price
points
No concern
• Confident past most of taxi medallion issues: Management expressed confidence
that it has taken care of most of the issues on its Chicago taxi medallion loan book
and is seeing stabilization of its New York book with New York fleets near 100%
utilization. Management also expects the $20mn +/- in quarterly provisioning
outlook to absorb the impact from any incremental provisioning associated with the
medallion portfolio.
Chart 40: How much does SBNY’s taxi medallion exposure impact your decision to invest in
the stock?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
33%
Not at all, the portfolio only
accounts for 2% of total loans
40%
A little bit, I think this portfolio
could continue to cause some
EPS volatility
27%
I am staying away from the
name due to this exposure
Source: BofA Merrill Lynch Global Research
Synovus Financial (SNV), C-2-7, Neutral
• SNV hesitant to react too quickly to post-election excitement. Chairman and
CEO Kessel Stelling noted that despite the very positive reaction seen in bank
stocks from the results of the US elections, it was too soon to say the real impact
on growth outlook. That said, he believes that a more encouraging business climate
(i.e. increased infrastructure spending) as well as some regulatory relief (i.e. raising
the $50bn asset threshold) could be a benefit for SNV and the overall industry.
• SNV could see a benefit at both ends of a steepening yield curve. As of 3Q16,
50% of SNV’s total loan portfolio was fixed rate (includes variable rate loans with
floors), implying a benefit to spread income from a rise in both the short- and longend
of the yield curve. With the futures market now pricing in a 94% probability the
Fed raises rates in Dec., CFO Kevin Blair believes the net interest margin could
expand by 6bp in from a 25bp rate hike (vs. +9bp last year). That said, the benefit is
2016 Future of Financials Conference | 17 November 2016 27
dependent on what happens with deposit costs. SNV’s current sensitivity analysis
assumes a 50-60% deposit beta.
• SNV keenly focused on credit. Chief Credit Officer Kevin Howard noted
expectations for net charge-offs to naturally tick up as recoveries become less of a
benefit and some seasoning in the loan portfolio. Recall during its earnings call,
management lowered its FY16 net charge-off range to 10-20bp (3Q: 12bp). Mr.
Howard noted that he would not be surprised if NCOs increased to 15-20bp in 2017
(cons: 12bp) and stay near those levels for the near future.
• Management reiterated its intent to continue to deploy excess capital.
Although SNV will disclose a more detailed capital plan in January, management
expects to continue deploying excess capital via buybacks, M&A and/or organic
growth. When asked how management should utilize its excess capital, 56% of the
audience polled prefers SNV pursue M&A opportunities (vs. 8% last year). In
reaction, Mr. Stelling noted continued interest in strategic acquisitions (like Entaire)
but hesitant to execute a large, dilutive transaction. While DTA accretion could allow
for continued share repurchase, management may choose to be a bit more
opportunistic around buybacks given the run up in the stock.
Chart 41: What would you like to see management do with its excess capital?
60%
56%
50%
40%
33%
30%
20%
10%
0%
0%
Be even more
aggressive on
buybacks
11%
Increase the dividend
payout
Support faster organic
growth
Pursue M&A
opportunities
Source: BofA Merrill Lynch Global Research
• Management is positive but cautious on online lending partnerships. Investors
were also relatively split in how they view SNV’s partnerships with online lenders
SoFi and GreenSky. The majority (57%) remains cautious on how these loans will
perform during a credit cycle. Mr. Stelling agreed; however, he believes these
partnerships represent the right vehicle to help the bank grow its retail portfolio to
20-25% of loans (in line with its strategy to transition away from CRE) and achieve
its 1.0% ROA target (3Q: 0.88%). Although we note that SNV is being deliberate
around growing this book and is targeting these loans to grow to approximately 2-
3% of total loans.
28 2016 Future of Financials Conference | 17 November 2016
Chart 42: How do you view SNV’s partnerships with online lenders (SoFi/GreenSky)?
57%
43%
70%
60%
50%
40%
30%
20%
10%
0%
Positively. Creates another
avenue for loan growth
Cautiously. Unsure how these
loans will perform during a
credit downturn
0%
Indifferent. The exposure is
relatively small so does not
matter either ways
Source: BofA Merrill Lynch Global Research
Texas Capital Bancshares (TCBI) C-2-9, Neutral
• Upbeat on business outlook: TCBI’s President & CEO Keith Cargill, CFO & COO
Peter Bartholow, CAO Julie Anderson, and CLO Vince Ackerson were relatively
upbeat about TCBI’s business outlook. Management expects its mortgage
businesses, particularly MCA to be to be a source of strength even if overall
mortgage volumes were to slow down due to the rise in interest rates. Management
expects to mitigate the negative impact from lower mortgage activity by picking up
greater wallet share of existing clients and given the option to bring back to the
balance sheet loan participations. Regarding expenses, despite expectations for an
uptick in the efficiency ratio over the next couple of quarters management expects
to beat its 2016 efficiency guidance (low-to-mid 50s).
Chart 43: What would drive you to buy or increase your positioning in TCBI?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
0%
Stronger loan
growth
20%
Higher interest
rates
Source: BofA Merrill Lynch Global Research
47%
Better visibility on
the outlook for the
Texas economy
and oil prices
20%
A pick-up in bank
M&A activity,
especially in
Texas
13%
A pull back in the
stock
• Credit provisioning likely to trend lower in 2017: During an investor poll, nearly
half of investors expect credit provisions to be lower in 2017 vs. 2016, based on
expectations for stabilization in oil prices. Management expressed comfort that
reserve levels should be adequate even if oil prices were to decline to the mid-tohigh
$30s in the near term (vs. spot WTI prices of $45/bbl today). However,
management would need to consider increasing its reserve level if oil falls to the
high $20s. Conversely, if oil stabilizes in the high $50s-low $60 levels, management
could consider reserve releases. Management stressed on looking at the forward
curve when assessing the impact from oil prices on credit costs vs. the spot rate.
2016 Future of Financials Conference | 17 November 2016 29
With regard to growth in the energy book management expects balances to stay
relatively flattish as new growth is offset by pay downs and deleveraging.
Chart 44: Where do you see TCBI’s provisioning in 2017 relative to 2016?
50%
47%
45%
40%
37%
35%
30%
25%
20%
15%
10%
5%
0%
Lower, given the stabilization
in oil prices which should lead
to reserve reversals
Source: BofA Merrill Lynch Global Research
Flat-to-higher, given credit
normalization in the rest of the
book
• Mortgage growth to continue despite a downshift in activity: Management was
optimistic on the outlook for both its mortgage businesses – warehouse lending
and MCA businesses Management expects both these portfolios in aggregate to
total 28-33% of average total loan portfolio. Management tried to debunk the
perception that the MCA business was cannibalizing its warehouse lending business
and noted that two business were complimentary in nature. Moreover, while initially
the vast majority of the MCA customers were the ones that TCBI had a relationship
on the warehouse lending side, it noted that that number had fallen to 50% and is
likely to move lower over the coming quarters. TCBI has a dedicated sales force
prospecting for the MCA business.
16%
Uncertain, as volatility in oil
prices could lead to an
elevated level of provisioning
• Next rate hike to give a bigger boost to EPS: Management noted its high asset
sensitivity with most of their loans tied to LIBOR and prime and its expectations for
an increase in funding costs to remain relatively tempered. With strong demand
deposit growth during the year and a $1bn reduction in loans with floors (from
$3.1bn to $2bn), TCBI has become more asset sensitive relative to last year, when a
rate hike led to a $4mn increase in spread income. Management expects a Dec rate
hike to boost spread income by more than $4mn a quarter.
• Remains cautious around CRE lending: Management noted that it intends to grow
CRE more slowly as it de-risks the portfolio and until it sees a turn in the cycle.
However, management is optimistic on the credit quality of CRE, particularly noting
that trends in its Houston real estate portfolio (Houston special mention loans are
1% of Houston CRE) continue to be fairly benign.
US Bancorp (USB), B-2-7, Neutral
• Strong growth outlook across the business spectrum. CEO Richard Davis
provided an upbeat view around the outlook for the economy across the business
spectrum ranging from small businesses to large corporates and noted that
businesses could drive the economic recovery vs the consumer side.
30 2016 Future of Financials Conference | 17 November 2016
• Continued investments in regulatory costs despite potential regulatory relief.
On the topic of regulation, management noted that it is still too early to know what
type of regulatory relief banks of USB’s size may receive so management has not
slowed down any of its investments in regulatory costs.
• Long term 13.5- 16.5% ROE target unchanged. Despite the outlook for higher
rates, management noted that it was not going to change the range at this point of
time but noted that USB could reach the top end sooner than later if its outlook
proves accurate.
• Risk management compliance expenses sustaining at this level. Management
noted that while compliance related expenses could trend lower following the new
administration, it will continue to invest and the impact will likely not be
meaningful.
• In terms of innovation projects, 86% of those polled noted that it should
invest in innovations projects that are self-funded. Davis noted that given the
importance of innovation, it would not just self-fund those expenses and would look
to spend money for long term benefits. In terms of its P2P initiative with Zelle,
Davis was optimistic around its growth.
• In terms of potential M&A, management noted that it would look for in market
opportunities and double down where it has scale.
Chart 45: What do you consider to be the most important catalyst for large-cap banks in 2017?
60%
50%
52%
40%
36%
30%
20%
10%
0%
Rising interest
rates
8%
Revenue growth
that’s not interest
rate driven
0%
Further
realignment of
cost structures
4%
Stronger return of
capital to
shareholders
Less overhang
from regulatory
and litigation
challenges
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 31
Chart 46: What do you consider to be the most important catalyst for USB in 2017?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
43%
0%
Sustained operating Further acceleration of
leverage, regardless of capital return
rate backdrop
14%
Using excess capital
and strong currency to
engage in nondepository
deals
43%
Rising interest rates
Source: BofA Merrill Lynch Global Research
Wells Fargo & Co (WFC), B-1-7, Buy
• WFC sees modestly better benefit from steepening yield curve vs parallel shift.
Following the election, the 10yr yield is up 37bp while futures currently imply a 94%
probability the Fed raises rates in Dec. As such, Treasurer Neal Blinde noted that
WFC could realize a modestly better benefit to spread income from a steepening
yield curve vs. the current +$150mn/qtr expectation from a 25bp parallel shift. He
outlined how the bank’s actions to manage an interest rate cycle via balance sheet
positioning protect on the downside (i.e. post-Brexit) while at the same time allow
for an uptick when rates rise. WFC received numerous investor questions on when
they would deploy its dry power ($572bn in liquidity), and management noted that
the rate backdrop – not question marks on deposit duration – mostly drove
deployment decisions.
• WFC reiterated its performance targets disclosed at its Investor Day. WFC
reiterated its 2-yr performance targets: (1) 1.1-1.4% ROA; (2) 11-14% ROE; (3) 55-
59% efficiency ratio; and (4) 55-75% net capital payout. As of 3Q16, the bank is
currently within these ranges on all metrics except for efficiency (3Q: 59.4%). This
is consistent with the 61% of the audience polled that expect WFC to perform
within the targeted ROE range as headwinds from Retail Banking is offset by an
improvement in the macro-economy. That said, 50% of the audience polled believe
the issues arising from the retail sales issue will modestly impact earnings (0-5%).
Chart 47: Based on your post-election outlook for 2017, how do you
think WFC will perform against this 2 year target?
Chart 48: What do you think is the earnings impact of the retail sales
practices issue?
70%
60%
50%
40%
30%
20%
10%
0%
39%
Outperform the
range, given likely
higher interest rates
than expected and
less headwind from
regulation
61%
Perform within the
range, as lower
contribution from the
Community Bank will
mitigate a stronger
macro backdrop
0%
Underperform the
range, as consensus
in underestimating
the earnings impact
from the retail sales
practices issues.
60%
50%
40%
30%
20%
10%
0%
37%
50%
13%
Meaningful, at over
5% of EPS, given lost
revenues and higher
operating and
marketing costs
Modest, between 0-
5% of EPS
Community Bank
earnings will be offset
by the rest of the
firm, resulting in no
impact to EPS power
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
32 2016 Future of Financials Conference | 17 November 2016
• WFC continues to make progress on regulatory compliance. As of 3Q, WFC’s
current total loss absorbing capacity (TLAC) shortfall was 2.1% of risk weighted
assets or $29bn ($43bn including its internal buffer), an $8bn QoQ improvement.
That said, Mr Blinde assured investors that WFC will continue to focus on deposit
growth (66% of total funding) even as its long-term debt needs continue. WFC is
compliant with the liquidity coverage ratio (LCR).
• Potential changes to annual stress test process viewed as positive. Mr. Blinde
noted that potential changes to the annual stress test process, as proposed by Gov.
Tarullo in Sept., is a “real” positive, specifically as it reduces any variance between
how the stressed risk weighted asset balance is calculated. This is likely positive for
the majority of investors polled (31%) who think capital return is the biggest
catalyst for the stock and the (70%) who see the dividend payout growing towards
the 40-50% range long-term (currently 37%).
Chart 49: What do you think is the biggest catalyst for WFC shares over the next 12-24 months?
35%
30%
25%
20%
15%
10%
5%
0%
21%
24%
Better clarity Delivering clean
around the full and consistent
impact of the sales earnings results
practices issue close to or better
than current
consensus
14%
Achieving solid
revenue growth
regardless of the
rate environment
10%
Renewed focus on
expense
management to
drive the efficiency
ratio lower
31%
Accelerating
capital return, with
focus on the
dividend
Source: BofA Merrill Lynch Global Research
Chart 50: As a result, what do you think WFC's long-term dividend payout ratio will be?
40%
35%
30%
25%
20%
15%
10%
5%
0%
16%
Near the current level
of 37%
35% 35%
14%
40-45% 45-50% >50%
Source: BofA Merrill Lynch Global Research
• Note: WFC is scheduled to report October customer activity in Retail Banking on
Thur, Nov. 17th at 9am ET.
Zions Bancorporation (ZION), C-3-7, Underperform
• Sentiment post-election appears constructive on growth prospects. Consistent
with other bank management teams speaking at this year’s conference, CFO Paul
Burdiss noted that small businesses have been reluctant to invest given the
2016 Future of Financials Conference | 17 November 2016 33
uncertain macro backdrop. That said, following the results of the election, and
assuming the new administration can create fiscal stimulus, management sounded
optimistic around growth prospects in C&I (10% ex-energy YoY), owner-occupied,
etc.
• Energy portfolio performing in-line with expectations. Management reaffirmed
the >8% allowance on its energy portfolio ($2.3mn or 5% of total loans) remains
sufficient to cover future losses. However, continued stress in its oilfield services
portfolio (26% of portfolio) remains the primary reason behind ZION’s cautious
view. This was consistent with the 60% of the audience polled whose ownership in
the stock is modestly influenced by this portfolio. That said, until supply/demand
fundamentals improve or activity picks up, material reserve release is unlikely.
Chart 51: How much does credit quality in ZION’s energy portfolio influence your decision on owning
the stock?
70%
60%
60%
50%
40%
30%
27%
20%
13%
10%
0%
Still a material factor in my
investment decision
A modest factor in my
investment decision
No longer a factor in my
investment decision
Source: BofA Merrill Lynch Global Research
• Steepening yield curve a modest benefit, though short-end matters more.
Despite recent actions that have reduced the bank’s asset sensitivity, ZION remains
the most asset sensitive among US banks. For a 25bp rise in the short-end, ZION
estimates a $30mn incremental benefit to spread income. That said, due to the
variable-rate mismatch between assets/liabilities, a steeper yield curve is expected
to have a marginal impact.
• Potential changes to CCAR viewed as positive for ZION. Mr. Burdiss viewed the
potential change to the annual stress test (CCAR), specifically the static RWA
balance, as net positive for the bank/industry. That said, overall these changes are
immaterial as CCAR remains their capital constraint. Although only 14% of the
audience polled think more aggressive capital return is the most important catalyst
for the stock (top response: 29% for stronger revenue growth), investor bias leaned
higher as it relates to total payout.
34 2016 Future of Financials Conference | 17 November 2016
Chart 52: What do you consider as the single most important catalyst for ZION shares in 2017?
35%
30%
25%
20%
15%
10%
5%
0%
14% 14%
Greater comfort
around potential
energy losses
More aggressive
capital return to
shareholders
29%
Stronger revenue
growth regardless
of what happens
to interest rates
21% 21%
Continued
expense savings
to achieve an
efficiency ratio in
the low 60%s for
FY17
Higher interest
rates
Source: BofA Merrill Lynch Global Research
Chart 53: Compared to this year’s CCAR capital ask which implies a total
payout of ~60%, what level would you like to see ZION’s 2017 CCAR
payout increase to?
Chart 54: ZION expects total expenses in 2016 to come in below
$1.58bn and then slightly increase in 2017. Would you prefer absolute
expenses be flat to down in 2017?
40%
35%
36%
80%
70%
69%
30%
60%
25%
20%
15%
21% 21% 21%
50%
40%
30%
31%
10%
20%
5%
10%
0%
Remain at 60% 70% 80% Greater than
80%
0%
Yes
Indifferent; I’m more focused on
the efficiency target
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
Brokers Top 5 Takeaways
Goldman Sachs (GS), B-1-7, Buy
• GS’ Harvey Schwartz, CFO, and Harit Talwar, Head of Digital Finance presented at
our conference. Overall, Harvey and Harit were optimistic about the consumer
lending opportunity with Marcus as well as the overall outlook for the firm.
• When asked about what would get investors more interested in GS stock, 51% of
the investors responding to the poll voted for a stronger revenue backdrop, while
34% voted for normalizing regulations and ability to return more capital.
2016 Future of Financials Conference | 17 November 2016 35
Chart 55: What would get you more interested in investing in GS stock?
60%
50%
51%
40%
34%
30%
20%
10%
10%
5%
0%
A stronger revenue
backdrop
Normalizing regulations
and ability to return
more capital
Investing to drive
improving returns
Additional expense
reductions
Source: BofA Merrill Lynch Global Research
• Management focused the presentation on Marcus, Goldman’s new consumer
lending effort. This venture has significant potential with an unsecured consumer
loan target market of $850B and Goldman coming to the market with a unique
skillset of technology and risk management, no channel conflicts or bricks and
mortar, a strong balance sheet that can provide loans at a meaningful discount to
peers, and a long history in the financial markets with a strong brand. When fully
ramped up, this unit could produce pre-tax ROA’s of 3-4%, and assuming 9-11%
equity commitments, this could translate into a high teens ROE.
• Given the positive sector/GS stock reaction post the election, management was
asked on what they thought about the future of current regulation and activity
levels. While they said it is too early to tell the impact, a lower corporate tax rate
would benefit GS some, a pro-growth policy could positively impact
confidence/activity levels, and some de-regulation could ease some of the
operational challenges, though much of the regulation was well intended and has
created a stronger industry.
• In terms of the current environment, GS didn’t give an exact update, but said
activity has been healthy and around the election activity was similar to around
Brexit (slow before and very active post). Most other firms also mentioned positive
trends in 4Q, with normal seasonality, but up materially year over year.
Asset Managers Top 5 Takeaways
Invesco (IVZ), C-1-7, Buy
• Presenting from IVZ was Loren Starr, CFO. Overall Loren was optimistic on the
outlook for IVZ to generate above average organic growth given its product mix and
performance, deliver cost savings, and accelerate buybacks, and does not expect a
significant change in the DOL impact from the election.
• When asked what would get investors more excited about investing in IVZ stock, the
majority of respondents said that a consistent above average organic growth rate
would get them most excited (48%), followed by a more favorable market backdrop
(38%), less regulation (10%), and more operating leverage (5%), while nobody said
longer term FX hedged would get them more interested.
36 2016 Future of Financials Conference | 17 November 2016
Chart 56: What would get you more interested in investing in IVZ stock?
60%
50%
48%
40%
38%
30%
20%
10%
0%
Consistent above
average organic
growth
A more favorable
market backdrop
10%
Less regulation for
the industry
5%
More operating
leverage
0%
Longer term FX
hedges
Source: BofA Merrill Lynch Global Research
• IVZ is confident it can achieve its 3-5% organic growth rate driven by three main
pillars. The first being the ongoing search for yield driving fixed income
flows/allocation which IVZ has benefitted from and should continue to benefit given
their strong performance, distribution, and product set. The second being ongoing
“barbelling” by clients which drives flows into passive and alternatives, two
products IVZ has leadership in. Lastly, IVZ sees opportunity in its institutional
channel, particularly in Asia which has had notable momentum.
• Given the run up in rates, IVZ touched upon its fixed income exposure and what
might be at risk of underperformance/outflows. IVZ mentioned roughly $100B of its
AUM or ~13% was in fixed income that didn’t include short duration or floating
rate, a number they feel is relatively small compared to some of its peers.
Additionally, within that $100B a major portion had been underperforming because
of strategic shorter duration, which in a rising rate environment should lead to
outperformance and potentially negate some of the flow headwind.
• Regarding potential changes from the election, while very early, management thinks
that whatever happens to the DOL Fiduciary Rule (delay, modify, etc.), the industry
has already been shifting in a fiduciary direction, and they expect that to continue,
though the pace could vary depending on the eventual outcome. Additionally, IVZ is
relatively well positioned given its diversification among ETF/passive and active
strategies, as well as similar regulations in Europe that it has managed through. In
terms of a lower corporate tax rate, that would not have much impact to IVZ given
its Bermuda domicile.
Eaton Vance (EV), B-3-7, Underperform
• Presenting from EV was Thomas Faust, CEO, Laurie Hylton, CFO, and Dan Cataldo,
Head of IR and Treasurer. Management reported relatively positive F4Q flows,
expects organic growth to hold up well given its mix and performance, and does not
expect a significant change in the DOL impact from the election, but would expect
a significant benefit from a lower US corporate tax rate.
• When asked what would get you more interested in EV’s stock, the majority of
investors were fairly split between better high fee flows and ETMFs taking off
(38%/31% respectively). Investors also thought increased capital return was
2016 Future of Financials Conference | 17 November 2016 37
important (23%) while investors thought more operating leverage was least
important for EV (8%).
Chart 57: What would get you more interested in investing in EV stock?
40%
38%
35%
30%
31%
25%
23%
20%
15%
10%
8%
5%
0%
Stronger high-fee flows
and a favorable fee rate
ETMFs taking off Increased capital return Positive operating
leverage aiding the margin
Source: BofA Merrill Lynch Global Research
• EV disclosed their F4Q AUM which was $336.4B up modestly from $334.4B at the
end of its prior quarter as modest market losses were offset by inflows which were
also disclosed by EV. Flows for C3Q (F4Q) were $4.8B/6% aog or $1.7B/3% aog ex
exposure management flows, roughly in-line with expectations in a fairly
challenging backdrop. EV also commented on their recent acquisition of Calvert
Investments (~$12B AUM, see note) and is excited about the opportunity in ESG
investing. Calvert is a leader in investing in socially responsible companies, a small
but rapidly growing area.
• When asked about the outlook on fixed income performance and flows given the
recent run up in rates as well as the outlook, EV was fairly positive in their outlook
given their positioning and leadership in floating rate which should perform well
and attract flows in a rising rate environment.
• ETMFs continue to be topical for EV given they are the only player in the nontransparent
active ETF business with their NextShares franchise. EV has launched 3
NextShares thus far and Waddell and Reed launched 3 of their own in October,
making 6 total NextShares in the market right now, however they are only available
through Folio and Interactive Brokers. While we continue to view this as not very
significant in the near term and a potential longer term opportunity, with EV signing
on UBS and Envestnet for distribution in 2017, we should see a little more traction
ahead.
• Regarding potential changes from the election, while very early, management thinks
that whatever happens to the DOL Fiduciary Rule (delay, modify, etc.), the industry
has already been shifting in a fiduciary direction, and they expect that to continue,
though the pace could vary depending on the eventual outcome. Additionally, EV has
limited exposure to higher distribution share classes (<20% of sales), so they see a
more limited impact. In terms of a lower corporate tax rate (15-20%), this would
have a meaningful benefit for EV, potentially increasing earnings by 15-20%.
38 2016 Future of Financials Conference | 17 November 2016
Legg Mason (LM), C-1-7, Buy
• Presenting from LM was Joe Sullivan, Chairman & CEO, and Alan Magleby, Head of
IR. Joe was optimistic on the flow outlook for LM given the repositioning over the
past few years, mostly favorable investment performance, and a healthy
institutional pipeline, and does not expect a significant change in the DOL impact
because of the election or a lower corporate tax rate on their cash tax rate.
• When asked what would get you more interested in investing in LM stock, investors
overwhelmingly (82%) replied “strong organic growth, particularly in
equity/alternatives” while the absence of deal noise (12%) and higher
margins/operating leverage (6%) were less interesting for investors. Nobody said
that a stronger balance sheet or more affiliate deals would get them more excited
about LM’s stock.
Chart 58: What would get you more interested in investing in LM stock?
90%
80%
82%
70%
60%
50%
40%
30%
20%
10%
0%
Stronger organic
growth, notably in
equity/alternatives
12%
The absence of deal
noise
6%
Operating leverage and
higher margins
0% 0%
A stronger balance
sheet
More affiliate deals
Source: BofA Merrill Lynch Global Research
• LM was relatively upbeat on the flow outlook, despite some ongoing headwinds for
the industry. Management sees the following drivers offsetting some of the
industry headwinds to position LM to flow better than the industry: strong
investment performance, notable progress with consultants over the last several
years, a healthy institutional pipeline ($8B of unfunded wins/$3B uncalled
committed capital), highest level of search activity in active equity in several years,
large cash balances in Europe (20-50% cash allocation across the continent),
increasing demand for real estate / infrastructure / alts (Clarion, RARE, and
EnTrustPermal), and a diverse / differentiated product/vehicle set.
• Management also mentioned that besides offering well performing products across
strategies, it also wants to be able to deliver to clients in different vehicles,
including ETFs. The firm has been launching some ETF products and also has an
interest in Precidian, which has its non-transparent ETF submission under the
review process.
• Regarding potential changes from the election, while very early, regarding the DOL
fiduciary rule, LM sees it getting delayed and watered down some as the most likely
outcome. However, they mentioned the fiduciary rule was just an accelerant for
trends that were already occurring (i.e. the shift to fee based accounts and away
from brokerages) and whether or not the rule goes through as expected or gets
2016 Future of Financials Conference | 17 November 2016 39
modified will not likely change the outlook. LM feels its strong positioning in global
distribution and product sets bodes well to perform in a new fiduciary world.
• Additionally, a lower potential U.S. corporate tax rate will not change its cash tax
rate which is likely to be 6-7% through 2021 and in the mid-teens through 2025
after that. However, it would impact GAAP EPS and a lower corporate tax rate
would lower the value of LM’s DTA.
AB (AB), B-1-8, Buy
• Presenting from AB was Peter Kraus, Chairman & CEO. Peter expects AB to
generate above average organic growth and hopes to accelerate it given its product
mix and mostly favorable investment performance. In addition, he sees the potential
for new pricing in the industry, and does not expect a significant change in the DOL
impact from the election or a lower corporate tax rate on their tax rate.
• When asked what would get you more interested in AB’s stock, 55% of investors
said they wanted to see consistent positive organic growth, 18% said a better
operating margin, another 18% said diversification from fixed income flows (i.e.
equity and alternative flows), and only 9% of investors wanted to see a simplified
structure and increased float.
Chart 59: What would get you more interested in investing in AB stock?
70%
60%
55%
50%
40%
30%
20%
18% 18%
10%
9%
0%
Consistent positive organic
growth
Operating leverage and an
improving margin
Further diversification from
fixed income flows
A more simplified structure and
increased float
Source: BofA Merrill Lynch Global Research
• AB has seen and expects to continue to see above average organic growth (ex 3Q
which was weighed down by lumpy institutional outflows) given a relatively new
and attractive product set, strong investment performance (notable improvement in
recent years), better traction with the consultant community, and opportunities to
gain in the retail and private wealth channels.
• Regarding potential changes post the election, AB had a similar tone to other asset
managers on DOL, in the sense that it likely gets delayed/modestly modified, but
regardless of what happens, asset managers and distributors need to accept that
the industry is living in a new fiduciary world with minimized (potentially no)
conflicts of interest which ultimately is a good thing for end clients. A lower
potential corporate tax rate would not likely benefit AB given its tax structure/low
current tax rate.
40 2016 Future of Financials Conference | 17 November 2016
• Another topic which AB elaborated on was fees/pricing particularly in the US retail
market. Peter Kraus commented that there is a very strong philosophical argument
for the regulators to approve new fee structures which would allow investors to pay
a low beta fee and a higher performance fee for alpha generated (while it exists in
Europe, a similar structure is not available in the U.S.). While some in the industry
may not be fans to adapt such a structure, given challenging cost structure changes,
he thinks the product could be much more competitive relative to passive products.
Alternative Asset Manager Top Takeaways
Ares Management (ARES), C-2-7, Neutral
• Michael Arougheti, Co-founder and President, presented for Ares. Overall, Mr.
Arougheti was positive on the firm’s growth prospects, given demand for their
products across the platform by institutional investors. In addition, given recent
fundraising and fees on the horizon, the outlook for FRE and DE is attractive.
• When asked “What would get you more interested in investing in ARES stock?” the
most common response was a higher float and reduced tax complexity (64%),
followed by more diversification in the business model (21%), and confidence in an
attractive credit return outlook (14%). Investors were less concerned over the
visibility on the distribution (0%).
Chart 60: What would get you more interested in investing in ARES stock?
70%
64%
60%
50%
40%
30%
20%
14%
21%
10%
0%
A higher float and
reduced tax complexity
Confidence in an
attractive credit return
outlook
More diversification in
the business model
0%
Increased visibility on
the distribution
Source: BofA Merrill Lynch Global Research
• If comprehensive tax reform includes an elimination of carried interest tax,
potentially moving to an ordinary income rate, it could have some impact to after
tax unitholder returns, but 80-90% of revenue comes from management fees and
much of the income already faces a corporate tax rate. It could make it more
attractive to shift to a C-corp. A change to the tax deductibility of interest expense
could have more far-reaching changes to the business, and to U.S.
• Ares will always look to do tuck-in acquisitions, and has been doing almost one a
year. The pipeline of M&A opportunities continues to grow for ARES, given
demographics of principles with founders aging, and the environment becoming
harder to compete for small managers.
The Blackstone Group (BX), C-2-8, Neutral
• Jonathan Gray, Global Head of Real Estate, presented for Blackstone. Overall, Mr.
Gray was positive on the outlook for the U.S., with new pro-growth fiscal policies
2016 Future of Financials Conference | 17 November 2016 41
likely. Mr. Gray also thinks that concerns over the commercial real estate market
may be overdone.
• When asked “What would get you more interested in investing in BX stock?” the
most common response was a market pullback (30%), followed by comfort on the
direction of the real estate market (25%), rising returns and visibility on
distributions (21%), and a more simplified structure (20%), while fundraising and
margin improvement were less important (4%).
Chart 61: What would get you more interested in investing in BX stock?
35%
30%
25%
20%
21%
25%
30%
20%
15%
10%
5%
4%
0%
Rising
markets/returns and
visibility on DE and
distributions
Improving
FRE/margins
following strong
fundraising
Comfort on the
direction of the real
estate market &
hedge funds
A market pullback for
better
deployment/returns
A more simplified
corporate/tax
structure
Source: BofA Merrill Lynch Global Research
• Mr. Gray thinks the economic narrative has changed for the U.S., from low growth
and low interest rates to a more pro-growth outlook. There will likely be lower
taxes, less regulation, and more fiscal spending. A potential offset is that deficits
from government spending and tariffs could create inflation. Even so, management
was cautiously optimistic on growth.
• For Europe, Brexit was the big news and Mr. Gray expects the next couple of years
will be somewhat challenging for the U.K, though the bigger question is core
Europe, where rates and inflation are likely to be lower for longer. In Asia, China is
decelerating, particularly for manufacturing, infrastructure, and real estate which
will likely continue though don’t expect a hard landing in China. A trade war
between the U.S. and China could be a risk to the downside for China. In India, BX
sees accelerating economic growth and falling inflation and interest rates, along
with a lot of demand for office space in India.
• Mr. Gray does not believe we are in the early stages of the real estate cycle, but
concern over a bubble in commercial real estate in the U.S. is probably overdone for
a couple of reasons. 1) Supply and demand are reasonable, given modest growth in
supply and an economy that is growing. 2) Debt levels aren’t out of hand like in
‘06/’07. 3) Cap rates are low at around 5%, compared to ‘07 when 10yr treasuries
were at the same level. Overall, you aren’t going to see the same returns as in the
past, but looking at past periods where rates and growth increased, commercial real
estate did fine.
• In terms of growth, Mr. Gray is optimistic on the outlook. Half of the areas BX
invests in today didn’t exist at the time of the IPO, and that culture of innovation,
growth, and investing for attractive returns is alive and well.
42 2016 Future of Financials Conference | 17 November 2016
Carlyle Group (CG), C-2-8, Neutral
• Glenn Youngkin, President and Chief Operating Officer, presented for CG. Overall,
Mr. Youngkin is positive on the economic/market backdrop and on CG’s ability to
generate cash carry relatively consistently over time given the firm’s diversity of
funds.
• When asked “What would get you more interested in investing in CG stock?” most
investors would like to see an increased float and reduced complexity (40%),
followed closely by rising fee related earnings (30%). Investors are also interested
in seeing increased visibility on the distribution (15%) and increased contribution
from RA and GMS segments (15%).
Chart 62: What would get you more interested in investing in CG stock?
45%
40%
40%
35%
30%
30%
25%
20%
15%
15% 15%
10%
5%
0%
Rising fee related
earnings
Increased visibility on
the distribution
Increased contribution
from RA and GMS
segments
Increased float and
reduced complexity
Source: BofA Merrill Lynch Global Research
• If comprehensive tax reform includes an elimination of carried interest tax,
potentially moving to an ordinary income rate, it could have some impact to after
tax unitholder returns. However, Glenn thinks it is very early to speculate on any
changes and expects tax changes to likely be comprehensive.
• Glenn sees the potential for a strong push in infrastructure, along with tax change,
defense spending, and the border will get a lot of attention along with international
trade. Three main conclusions: 1) First time in a long time that there is a universal
pro-business outlook across congress and the presidential office; 2) Unclear today
what is going to be enacted, there is optimism but uncertainty; and 3) CG is not
going to make meaningful changes one way or another based on speculation. CG
launched its latest infrastructure fund in September, and the election results are
more wind in the sails.
• CG has multiple funds, each with its own economic engine. That makes the cash
flow profile more stable than other firms. Management believes that a discounted
valuation in the stock is driven more by fear of a recession vs. lower FRE. Glenn
thinks that outlook has changed with the election. The economy may be going into
extra innings now.
• The investment environment hasn’t changed materially in last few weeks - it
continues to be tough. Global growth will continue to be muted, and despite the
2016 Future of Financials Conference | 17 November 2016 43
move in the ten year treasury rate, interest rates remain low and the combination
of those things results in high prices.
KKR & Co (KKR), C-1-8, Buy
• Bill Janetschek, Chief Financial Officer, presented for KKR. Overall, Mr. Janetschek
believes that KKR’s balance sheet gives them the ability to take advantage of
market dislocations, sees opportunities to grow in certain areas (e.g. infrastructure
and real estate), and noted that they don’t need to grow the headcount to bring on
more assets.
• When asked “What would get you more interested in investing in KKR stock?” the
most common response was a market pullback for better deployment/returns
(50%). Respondents also felt that attractive returns and book value growth (33%),
and stronger fee related earnings (17%) were also important. Less important for
investors was improving energy markets and overall market confidence (0%).
Chart 63: What would get you more interested in investing in KKR stock?
60%
50%
50%
40%
33%
30%
20%
17%
10%
0%
Stronger fee related
earnings
Attractive returns and
book value growth
0%
Improving energy
markets and overall
market confidence
A market pullback for
better
deployment/returns
Source: BofA Merrill Lynch Global Research
• Overall, KKR likes the publicly traded partnership structure today. If comprehensive
tax reform includes an elimination of carried interest tax, the income would still get
passed through in that scenario which avoids a second level of taxation, so it still
may not be attractive to change the structure. But, if the corporate rate is also
lowered significantly, it could potentially make sense to go to a c-corp.
• Bill sees infrastructure as a real growth area for KKR. 7-8 years ago it was difficult
to raise an infrastructure fund as the asset class didn’t do very well in the financial
crisis; today there is more interest. KKR’s first infrastructure fund was around $1B
and the second one was around $3B. Infrastructure needs are tremendous longterm,
with $1-2 trillion capital needed for projects over the next decade, and
infrastructure spend is one area of consistency across the two major parties.
• Management thinks that investors understand the reason for the change in the
distribution policy. KKR likes to pay out the stable dividend and redeploy capital into
the balance sheet. As part of the year-end process, KKR will likely review the level
of the fixed distribution and determine whether it should be changed. KKR would
like to have around 40% of the balance sheet invested in private equity over time.
• KKR will manage concentration risk, and it is unlikely that the firm will make
another investment as big as First Data again. The biggest advantage to having a
44 2016 Future of Financials Conference | 17 November 2016
large balance sheet is the ability to take advantage of market dislocation, along
with high margins.
• The firm grew at a healthy rate from 2004-2014, and with around 1,200 people
now there doesn’t need to be much growth in headcount for the time being, the
infrastructure is in place. Marshall Wace AUM has grown significantly since they did
the deal, due in part to advantages from combining the two firms. Real estate is an
area where KKR is small and could see more growth.
Specialty Finance
American Express Company (AXP), B-2-7, Neutral
• Presenting from American Express Company was Mr. Jeff Campbell, Chief Financial
Officer. Overall we thought AXP presented a fairly upbeat outlook on billings, loan
and revenue growth. AXP did express caution on near-term Discount rate pressures
and FX headwinds.
• When asked what would be a key factor to increase / initiate a position in AXP, 53%
of the audience said they would like to see better visibility in AXP’s core growth.
AXP acknowledged the sale of the Costco portfolio to Citi has added complexity to
reporting results and has provided additional disclosures on underlying trends in the
quarterly results. AXP also said that accelerating revenue growth is a key area of
focus for management.
Chart 64: What would be a key factor for you to increase / initiate a position in American Express?
60%
53%
40%
29%
20%
7%
13%
0%
Accelerating global
growth
Renewed visibility in
growth in AXP’s core
business
Solid execution of cost
reduction initiatives
More aggressive
capital management
Source: BofA Merrill Lynch Global Research
• AXP was a little surprised that more investors did not view its focus on loan growth
as an appropriate strategy to increase wallet share amongst the revolving segment.
Instead a plurality of investors viewed AXP’s strategy as appropriate in light of the
portfolio sale but risky due to the duration of the credit cycle. While investors were
concerned about the duration of the credit cycle, AXP emphasized its low loss rates
and premium customer base as well as the loss of the Costco portfolio to argue
that AXP's credit profile will not materially change from its current strategy to grow
revolving balances through revolving credit card customers.
Chart 65: How would you describe American Express’ strategy to expand exposure to credit?
60%
40%
20%
0%
8% 8%
Timely opportunity to
grow earnings while
credit costs are low
Appropriate strategy to
increase wallet share
amongst revolving
segment
46%
Appropriate in light of
the Costco portfolio
sale but risky due to
duration of credit cycle
38%
Risky due to extended
duration of the credit
cycle
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 45
• On a more cautious note, AXP said that Discount rate pressures are likely to remain
elevated near-term as EU merchants renegotiate contracts post-interchange rules
and the OptBlue program gains additional scale in the US. Strengthening in the
US$ will also lead to FX headwinds that will likely impact NT results, particularly
from countries like Mexico where AXP has a large business.
Conference Panels Top Takeaways
Contact your BofA sales representative for additional information.
Blockchain: Potential Transformation of Financial Markets
With Blockchain one of the most talked about potential disruption in financial services
and 71% polled noting that blockchain is a significant opportunity for financial service
firms, we thought it was timely to host a panel on the potential impact of Blockchain on
financial markets that included Co-founder & COO of R3 Todd McDonald and CEO of
Axoni Greg Schvey.
• Blockchain could lead to $60-80bn of annual potential cost savings for
financial institutions. While it is still early days to know what the full impact of
potential cost savings that blockchain technology could bring to financial
institutions, the panelists believe that total savings could reach $60-80bn.
• Successful implementation of equity swaps. An area where Blockchain has shown
to be successfully implemented is around equity swaps. Axoni had worked with
multiple financial institutions to handle data reconciliation around its equity swaps
record which drove efficiencies.
• Trade finance viewed as most likely for success. When asked which part of the
financial industry will be the first to successfully utilize blockchain technology, 38%
of those polled cited trade finance/transaction banking as the most likely, with 28%
citing capital markets & securities servicing.
Chart 66: Which part of the financial industry do you believe will be the first to successfully utilize
blockchain technology?
40%
38%
30%
20%
14%
28%
21%
10%
0%
Wholesale payments
(cross-border F/X,
correspondent banking)
Trade
fianance/transaction
banking (receivables
finance, commodities
trade finance)
Capital markets &
securities servicing
(securities settlement,
asset documentation)
Retail payments
(parallel currency
systems, remittances)
Source: BofA Merrill Lynch Global Research
• Implementation could be earlier than expected. While many investors are
skeptical that blockchain will be broadly adopted in the near term, with none of the
audience expecting it to be widely adopted within 12-24 months, the panelists were
more optimistic and believes that there could be upside surprise in terms of the
timing as proof points and implementation could happen more quickly than
expected.
46 2016 Future of Financials Conference | 17 November 2016
Chart 67: How knowledgeable are you with blockchain technology?
60%
50%
50%
40%
34%
30%
20%
16%
10%
0%
Very knowledgeable Moderately knowledgeable Not at all knowledgeable
Source: BofA Merrill Lynch Global Research
Chart 68: After this panel, how do you feel about the applicability of
blockchain technology in financial services?
Chart 69: How long do you think it will take for financial sevices
industries to broadly adapt blockchain technology?
80%
70%
60%
50%
40%
30%
20%
10%
0%
71%
14% 14%
A significant A modest opportunity
opportunity for for financial service
financial service firms firms
Overhyped
technology
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
40%
36%
24%
0%
12-24 months 3-5 years 5+ years 10+ years
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
The Future of Clearing: Understanding the Options
• Guest speakers in this panel included Brian Ruane (CEO, Broker Dealer Services,
BNY Mellon), Lee Betsill (Chief Risk Officer, CME Group), Michael C. Bodson
(President & CEO, DTCC), John Horkan (Head of North America and Global COO,
Rates & FX, LCH, LSE Group) and Marcus Denne (Director, Global Clearing, BofA
Merrill Lynch).
• With the start of the Uncleared Margin Rule (UMR) on September 1st, we asked
investors what was the primary challenge related to the new clearing rules. Most
investors (95%) thought the rising cost, particularly in the amount of collateral
required (50%) and the complexity around infrastructure and different country rules
(45%) were the main issues.
2016 Future of Financials Conference | 17 November 2016 47
Chart 70: What is the primary challenge related to the new clearing rules?
60%
50%
40%
50%
45%
30%
20%
10%
0%
The rising cost,
particularly in the
amount of collateral
required
The complexity around
infrastructure and
different country rules
2% 2%
The lack of dealers
offering the capabilities
given their challenges
None
Source: BofA Merrill Lynch Global Research
• Panel participants believe that the election/shift in regulatory outlook might lead to
a slowdown of products being added to the clearing mandate, with FX being the
biggest unknown.
• Going forward, firms are tackling U.S. vs Europe collateral harmonization/transfer
(DTCC and Euroclear are working on a collateral transfer initiative that is expected
to launch in 1Q17), collateral management through firms including BNY Mellon, and
Cleared repo could also be on the horizon (CME has filed an application with the
SEC but no timeline given).
• We asked investors what the biggest potential risks are in the clearing mandate and
CCPs, and 33% of voting investors thought collateral concentration issues with
cybersecurity (27%) coming in 2nd.
Chart 71: What is the biggest potential risk in the clearing mandate and CCPs?
35%
33%
30%
25%
27%
20%
15%
17%
17%
10%
7%
5%
0%
Much more
collateral will be
needed in stress
times
There will be
collateral
concentration
issues
CCP risk models
fail
Dealer/FCMs fail
Cybersecurity
Source: BofA Merrill Lynch Global Research
48 2016 Future of Financials Conference | 17 November 2016
Equity Market Structure: Simplifying the Complex
• Guest speakers in this panel included Anthony Barchetto (EVP, Head of Corporate
Development, BATS Global Markets, Inc.), Jamil Nazarali (Head of Execution
Services, Citadel Securities Inc.), Eric Stockland (Chief Strategy Officer, IEX Corp.)
and Pankil Patel (Managing Director, Electronic Sales, BofA Merrill Lynch).
• Panel members had a spirited debate regarding the current market structure pros
and cons, rebates, off-exchange trading, latency, market maker obligations, and the
future of regulation post the election.
• We asked investors what they thought of the current state of the equity market
structure, and 74% thought that the market needs revamping. 32% believe that
there was a problem with the depth of liquidity and 23% thought there were
misaligned incentives.
Chart 72: What is your view of the current state of the equity market structure?
35%
30%
25%
27%
32%
23%
20%
15%
14%
10%
5%
0%
The market
structure is overall
adequate
5%
The market
structure needs
improvement –
notably in
transparency
The market
structure needs
improvement –
notably in liquidity
of size
The market
structure needs
improvement –
notably in
misaligned
incentives
The market
structure needs a
full revamp
Source: BofA Merrill Lynch Global Research
• Given the announcement that SEC Chairwoman White will leave at the end of
President Obama’s term, this will likely lead to some regulatory uncertainty and lack
of activity given not enough commissioners to make forward progress. In addition,
the new Chair will likely be focused on less regulation and one panel member
thought Reg NMS could come under review.
Life after DOL: Evolving Beyond the Fiduciary Rule
• We hosted industry experts for a panel on the Department of Labor’s (DOL)
fiduciary rule, which is set to go into effect in April 2017. Panel participants
included Michael Hadley (Partner at Davis & Harman LLP), Lisa Bleier (Associate
General Counsel at SIFMA), and Kevin Crain (Head of Workplace Financial Solutions
at Bank of America Merrill Lynch).
• Given potential changes for the brokerage industry, we asked investors “Will the
DOL’s fiduciary rule cause meaningful changes to the brokerage industry?”. Most
investors believe that the rule will cause a number of significant changes to the
brokerage industry (83%), including significant pressure on commission revenues, a
shift to advisory and fee based accounts, and assets in motion with some to robo
advisor and RIA platforms.
2016 Future of Financials Conference | 17 November 2016 49
Chart 73: Will the DOL’s fiduciary rule cause meaningful changes to the brokerage industry?
90%
83%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3%
Yes, significant
pressure on
commission
revenues
7%
Yes, a shift to
advisory and fee
based accounts
0%
Yes, assets in
motion with some
to robo advisor
and RIA platforms
All of the above
7%
No significant
impact
Source: BofA Merrill Lynch Global Research
• We also asked about changes to the asset management industry, positing “Will the
DOL’s fiduciary rule cause meaningful changes to the asset management industry?”
Investors again expect multiple changes (91%), including an accelerated shift from
active to passive, further pricing pressure, and higher cost of distribution and
margin pressure. No respondents expect there to be no significant impact to the
asset management industry.
Chart 74: Will the DOL’s fiduciary rule cause meaningful changes to the asset management industry?
100%
90%
91%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
Yes, an
accelerated shift
from active to
passive
4% 4%
Yes, further Yes, higher cost of
pricing pressure distribution and
margin pressure
All of the above
0%
No significant
impact
Source: BofA Merrill Lynch Global Research
• The panel noted that President Elect Trump did not address the Fiduciary Rule
during his campaign, so his view on the rule is unknown, but Republicans have
largely been against it. There is some precedence on what we could expect
President Elect Trump to do with the fiduciary rule. President Bush had
implemented an investment advice regulation that President Obama delayed
several times until it was finally withdrawn. The view from the panel was that the
most likely action over the next several months is that President Elect Trump delays
the rule, though to repeal or change it would take work and new regulatory
50 2016 Future of Financials Conference | 17 November 2016
proposals. Mr. Trump and congress could also ultimately defer to the SEC to act on
a Fiduciary Rule.
• The biggest issue from the brokerage industry is the contract requirement under
the BIC. The issue with the contract is increased liability, given the contract makes
it easier to litigate. This would likely be the primary area for modifications. Even
though many firms have made announcements regarding changes they expect to
make, most have not figured out all of the underlying steps yet given that it is so
complicated and impacts large parts of the business.
• The industry will have to move forward on implementing the rule, given the April
2017 implementation date, but firms may not put as much effort into certain areas
that need to be final by January 2018. In addition, prior to Mr. Trump starting, the
transition team could make an announcement about the rule. However, even at that
stage firms would have to determine whether or not to act on the announcement.
• While the most likely scenario is a delay in the rule, with the potential for some
modifications to ease some of the burdens, most see the trend towards a fiduciary
rule already well in motion for the industry.
The Future of Tech-Based Lending
• James Paris, Executive Vice President at Avant, Ashish Jain, Senior Vice President at
SoFi and John Schleck, Senior Vice President at Bank of America discussed key
trends and recent developments in Tech-Based lending.
• Audience members and panelists generally agreed that improved customer service,
full spectrum lending, and better pricing all are contributing to the growth in techbased
lending. SoFi did caution that better pricing is not usually the primary driver
as banks can usually offer cheaper pricing.
Chart 75: What is the biggest driver of growth in tech-based lending
40%
30%
27%
27%
33%
20%
10%
13%
0%
Improved service
model
Full spectrum lending Better pricing –
cheaper
All the above
Source: BofA Merrill Lynch Global Research
• Acquisition models differ by company but being efficient at customer acquisition is
key for a successful tech-based lender. SoFi estimated that its customer acquisition
cost is 1/5 th that of a bank which enables it to effectively compete and partner with
banks. Panelists highlighted the use of data analytics to more efficiently target
potential customers via direct mail, digital ads or through affiliate programs.
• Audience members were split on the main risks to investing in tech-based
companies with limited sustainable competitive advantage, untested credit models
and fragile all highlighted as key risks. Somewhat surprising given events earlier
this year, regulatory concerns were not high on the list of investor concerns.
2016 Future of Financials Conference | 17 November 2016 51
Chart 76: Biggest risks to investing in a tech-based lending companies
40%
30%
29%
32% 32%
20%
10%
7%
0%
No sustainable
competitive advantage
Untested credit
model/risk
management
Fragile funding model
Uncertain regulatory
backdrop
Source: BofA Merrill Lynch Global Research
• Panelists agreed that flexible funding models that utilized both balance sheet
lending and distribution of loans were important for a tech based lender.
Additionally, panelists said that risk management is top of mind and tech based
lenders are increasingly applying refined analytics that rely on credit variables
directly from credit bureaus into their lending and portfolio management decisions
The Future of Payments: The Need for Speed
• Jonathan Lear, President – North America, Earthport and Bruce Parker, Founder of
Modopayments spoke on The Future of Payments panel. In a wide ranging
discussion, the panelists discussed the B2B opportunity, the importance of
partnering with incumbents and the need to maintain Safety standards.
• Audience members identified the lack of a clear value proposition for new players
relative to incumbents and concerns about Safety and Security as the largest risks
to investing in new Fin Tech payments companies.
Chart 77: What is the primary risk to investing in new entrants within the payments landscape?
40%
20%
0%
38%
Unclear value
proposition of new
entrants relative to
incumbents
Source: BofA Merrill Lynch Global Research
23%
Rapid innovation that
erodes value
proposition
38%
Concerns around
safety & security
0%
Intense regulatory
friction
• Panelists generally thought the best way for a new Fin Tech companies to succeed
was by partnering with incumbents. This was consistent with the views of audience
members, a majority of whom thought the payments industry would continue to be
controlled by incumbent institutions partnering with innovative tech companies.
52 2016 Future of Financials Conference | 17 November 2016
Chart 78: What do you believe will be the structure of the payments industry in 5-7 years?
80%
60%
59%
40%
28%
20%
0%
Dominated by large
incumbent payment
brands
Controlled by large
incumbent institutions
enable by innovative
tech companies
10%
Controlled by savvy
tech companies
operating through
traditional payments
providers
3%
Dominated by dynamic
eco-system of savvy
tech companies
Source: BofA Merrill Lynch Global Research
• Panelists highlighted that while recent innovations in faster payment transfers have
been focused on P2P applications, the B2B opportunity is 7-10x larger. That said,
panelists thought, based on experience in the UK, the cost of faster payments
would likely have to be borne by the existing payment infrastructure as consumers
have not been willing to pay for faster transfers. Additionally, panelists pointed out
that in countries where faster payments have been implemented, it has mostly been
a mandate by regulations suggesting the government has an important role to play.
• Panelists highlighted Security and Compliance as being essential for a new Fin Tech
company to be admitted as part of the industry ecosystem. Incumbent payment
companies will only partner with a new FinTech company that can meet the safety
and regulatory standards that the incumbent is required to meet.
Robo Advisors: Shedding Light on the Potential Opportunity
• Guest speakers in this panel included Eli Broverman (Co-Founder and President of
Betterment), Randy Sternke (Vice President, Business Development at Alkanza), and
Vaughn Bowman (Director, Managed Solutions Channel Management at BofAML).
Each firm discussed the unique aspects of their individual business models and
where they see the robo industry headed in the future.
• Broverman brought up several key points on how the independent robo advisor
model came about and why it will continue to grow in the future. He believes that
the main drivers include a lack of quality advice for investors with few assets,
investors’ beliefs that financial institutions are not aligned with their interests or
transparent, and the fact that people want financial services to work as well as the
other technology in their lives. Broverman believes that the biggest opportunity
going forward is in the mass affluent segment and the 401K space.
• Alkanza is focused on providing robo capabilities to financial advisory firms through
partnerships, rather than directly to consumers, with a focus on the platform as well
as portfolio construction.
• We surveyed the audience to gauge their views on the potential size of the robo
advisor market and the most common answer was that assets will surpass $1T,
followed by assets will hit $500B and then level out.
2016 Future of Financials Conference | 17 November 2016 53
Chart 79: How significant do you think robo advisor platforms will become over the next 3-5 years?
60%
50%
51%
40%
35%
30%
20%
14%
10%
0%
Assets will surpass $1T
Assets will hit $500B then level
out
Assets will hit $500B then
decline
Source: BofA Merrill Lynch Global Research
• Based on our polling questions, investors believe that the main beneficiaries of the
robo advisor trend will be the passive asset managers (40%), followed by the large
broker firms adding robo technology (28%) and the online brokers that have
scalable robo platforms (21%). They also believe that the main driver of success for
robo advisors will be a low and transparent cost structure (44%), followed by an
efficient technology and user interface (25%).
Chart 80: Which firms will benefit the most from the robo advisor trend?
45%
40%
40%
35%
30%
28%
25%
20%
21%
15%
10%
5%
0%
Passive asset
managers
Large broker firms
adopting robo
technology
Online broker robo
platforms that
have scale
9%
Independent B2C
robo advisor firms
2%
Robo advisor firms
that have a B2B
model
Source: BofA Merrill Lynch Global Research
54 2016 Future of Financials Conference | 17 November 2016
Chart 81: What do you expect to be the main driver of success for robo advisors?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
44%
A low and
transparent cost
structure
25%
11% 11%
An efficient Advanced portfolio
technology and construction that
interface platform outperforms
Department of
Labor fiduciary
rule
8%
Access to a
human in volatile
markets
Source: BofA Merrill Lynch Global Research
• Finally, all of the panel participants believe that the DOL Fiduciary Rule will not be
repealed by the new administration, although it may be delayed. In the end, this
should benefit robo advisors, as most of the models have low fee structures and
limited conflicts of interest.
State of the Multifamily Market: Cooling or Collapsing?
We hosted a panel to discuss the state and the outlook for the multifamily market
following a year which has witnessed increased investor anxiety around multifamily loan
growth and heightened scrutiny by banking regulators of multifamily loan portfolios,
particularly at banks with a high concentration of multifamily loans. Our panelists
included John Jardine, Co-CEO of Ares Commercial Real Estate Corp, David
Brickman, Executive Vice President and the Head of Multifamily business at
Freddie Mac and Alan Fishman, Chairman of the Board at commercial real estate
investment trust Ladder Capital.
• Multifamily on solid footing: The panelists view the multifamily market as having
a solid foundation with most of the risk lying at the high end, class A properties in
particular markets (New York, San Francisco). Even here, the panelists agreed that
the issues at the high end segment were more likely to manifest themselves in the
form of decelerating growth in rents (and increased incentives by landlords) as
opposed to serious credit issues. Investors echoed this sentiment during a live
audience poll with 60% of the investors seeing issues in the multifamily market
limited to certain regions and at certain rental price points.
2016 Future of Financials Conference | 17 November 2016 55
Chart 82: How do you view fundamentals for multifamily lending in 2017?
70%
60%
50%
40%
30%
20%
10%
0%
10%
Softening
fundamentals
should lead to
slower financing
activity next year
0%
Softening
fundamentals
should lead to
worsening credit
metrics
23%
Softening
fundamentals
should lead to
slower financing
activing and
worsening credit
metrics
60%
Some concern, but
only in certain
regions and at
certain rental price
points
7%
No concern
Source: BofA Merrill Lynch Global Research
• Future demand in multifamily promising: Looking forward, the panelists see
healthy demand for multifamily housing given a preference among millennials to
live in urban areas versus the suburbs. Moreover, the panelists noted that increasing
debt burden tied to student loans is likely to make home ownership out of reach for
several first time home buyers. Furthermore, it was noted that the US needs 1.5mn
new housing units each year and the present level of construction activity was not
keeping pace with this when looking at it on a national level.
• Foreign capital part of the equation: Some of the panelists are seeing a
significant flow of foreign capital into the multifamily market with Mr. Brickman
surmising that data around inflow of foreign capital into the commercial real estate
market was likely understated given that significant amount of inflows have come
indirectly through investment vehicles like private equity.
• Risk retention rules modest impact: Our multifamily panelists viewed the risk
retention rule for CMBS as having a modest impact given the large role played by
the GSEs in lending to the multifamily space. It was also noted that while the rule
may dampen private securitization activity, less competition from the CMBS
markets would be a positive for balance sheet lenders.
• Impact from rising rates may not be all news: While the panel acknowledged that
the rise in interest rates will likely push cap rates higher, an increase driven by a
more favorable growth outlook may not be as bad. This is because a stronger
economy should theoretically lead to a better backdrop for jobs and wage growth,
thereby providing landlords some leeway to raise rents.
The Future of Big Data in Financials
We hosted a panel to discuss how big data is impacting the financial services industry.
The panel discussed key big data buzzwords including machine learning, data scientist,
structured data and unstructured data. They panel also reviewed how different firms are
adapting big data solutions to solve specific company issues. Our panelists included
Jessica Donohue, the Chief Innovation Officer for State Street and the head of
advisory and information solutions for State Street Global Exchange, Greg
Michaelson, head of data science practice at Data Robot, and Sandeep Saini, head
56 2016 Future of Financials Conference | 17 November 2016
of global markets sales, research, and capital markets technology at Bank of
America Merrill Lynch.
• How big data can influence the future: The panel confirmed the notion that there
are many different definitions for big data, but everyone seemed to agree almost all
financial firms are seeking effective ways to implement big data techniques to 1)
generate alpha, 2) manage risk 3) manage expenses.
• Companies polled are a long way from benefitting big data: 96% of the
audience polled said their firm is either somewhat effective or not at all effective at
using big data. Some of the main challenges the panelists highlighted during our
discussion were merging multiple legacy data systems and finding attractive talent
with both data science and business experience.
Chart 83: How effective is your firm at using big data?
70%
60%
57%
50%
40%
39%
30%
20%
10%
4%
0%
Fully integrated with the
investment and process and
operations
Somewhat effective
Not at all effective
Source: BofA Merrill Lynch Global Research
• The panel discussed three roles needed to solve data science problems: 1)
someone who has sway to make change and implement solutions 2) business
champion, someone to discuss solutions with technical employees and to share
knowledge on key issues such as regulation 3) technically savvy employees.
• Implementation advice: The panel provided advice for firms that have yet to utilize
big data to attempt to solve problems facing their companies. The advice included
seeking problems that could be solved using data science and focusing on small
wins with the data present.
2016 Future of Financials Conference | 17 November 2016 57
Chart 84: Now that we’ve defined “big data”, how far do you think financial institutions are at
embracing the use of big data today?
60%
50%
40%
30%
20%
10%
0%
5%
Fully committed to
using big data to
generate
investment alpha /
revenue growth
19% 19%
Fully committed to
using big data to
improve cost or
process efficiency,
risk management,
regulatory
compliance
Fully committed to
using big data
across the
organization
49%
Somewhat
committed
8%
Not at all
committed
Source: BofA Merrill Lynch Global Research
Chart 85: After this conversation, have you changed your mind on how financial institutions are
adopting big data in their businesses?
60%
55%
50%
40%
30%
20%
23% 23%
10%
0%
Financial institutions are more
committed to allocating
resources to big data than I
thought
Financial institutions are less
committed to allocating
resources to big data than I
thought
No change
Source: BofA Merrill Lynch Global Research
The Future of Financials M&A and Regulation
We hosted a panel to discuss the state and outlook of M&A and regulation. Given the
results of the US election and the potential for easing of regulations, the panel
discussed a timely topic on the mind of investors. Our panelists included Rodgin Cohen,
Senior Chairman of Sullivan & Cromwell; Richard Kim, partner at Wachtell, Lipton,
Rosen & Katz, and Ed Hill, Senior Vice President, Government Affairs, Bank of
America Corporation.
• Regulation is about tone: Our panelists agreed that the scope and strength of
regulation comes from the tone and attitude of regulators rather than from
legislation. They noted that an attempt to repeal legislation such as Dodd-Frank
would be misplaced as most direction derives from the tops of regulatory bodies.
They also felt Senator Hensarling’s Financial Choice Act would not be a better
alternative to Dodd-Frank given the 10% leverage ratio is not a Federal Reserve
definition of leverage. Utilizing a Fed definition would likely lead to leverage north
of 10%. The inclusion of CAMEL ratings with the leverage ratio would also allow
regulatory sway over institutions.
58 2016 Future of Financials Conference | 17 November 2016
Chart 86: Following last week’s GOP sweep, do you think regulatory relief is in the cards for
the financial services industry?
70%
60%
50%
40%
30%
20%
10%
0%
29%
Yes, and this should have a
meaningful impact to returns
62%
Yes, but change in regulatory
burden and subsequent impact
to bank returns will be more
gradual than what financial
stocks are currently pricing in
9%
No, I think there will be little
change in regulatory burden
Source: BofA Merrill Lynch Global Research
• CCAR a product of regulatory attitude: The panelists agreed that CCAR in its
current form is not a result of legislation as post-recession bank stress tests (SCAP)
existed prior to Dodd-Frank. Furthermore, the panelists noted Dodd-Frank’s
definition of a stress test is very basic, which has been made more stringent and
complex as a result of regulators. Mr Cohen also noted that a lack of transparency
of the test was the least defensible part of CCAR.
• Biggest obstacle for bank M&A and activist influence is regulation. Despite
headlines of increased shareholder activism within the banking industry, the
majority of investors polled (61%) believe activist investors have only a moderate
impact on corporate strategy (see chart). Specifically, Mr. Cohen explained that two
of the three reasons why an activist will typically get involved with a corporate are
difficult to achieve on a bank’s board given the level of regulatory oversight on the
industry. While selling the bank is the one area where activists have had success,
this typically occurs at the community bank level. That said, he believes a change in
attitude of regulators could free up M&A activity.
Chart 87: What kind of impact does an activist investor have in corporate strategy and
ultimate shareholder value?
70%
60%
50%
40%
30%
20%
10%
0%
18%
Meaningful impact, as activism
behooves complacent Boards
to rethink corporate strategy in
a way that is most positive to
near-term and long-term
shareholder value
61%
21%
Moderate impact, as activism No meaningful impact, as many
can bring issues to the forefront activists have a short-sighted
and can invigorate deal view of shareholder value
discussions but have modest
influence in corporate strategy
and ultimate shareholder value
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 59
• How to do M&A right: When describing acquisitions that most impressed the
panelists, a key reason for success was the acquirer keeping the target
management in place as well as giving the target management independence. The
scope and planning of the integration was also critical for success.
Chart 88: Do you think M&A activity in financial services will pick
up in 2017?
Chart 89: If you voted yes, what statement closely matches your
rationale?
70%
60%
50%
40%
30%
20%
10%
0%
26%
57%
17%
Yes, meaningfully Yes, modestly No, I don’t think deal
activity will increase
60%
50%
40%
30%
20%
10%
0%
48% 47%
Lower anticipated
regulatory burden,
particularly on buyers
Modest economic
tailwinds and/or subscale
businesses will
behoove more
institutions to sell
5%
Shareholder activism
should pick up and
help drive activity
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
Understanding the Changing Fixed Income Markets
We hosted a panel to discuss the evolution of the fixed income market structure given
the advent of electronic trading and regulatory construct. Our panelists included Lee
Olesky (co-founder and CEO of Tradeweb), Adam Brown (Head of US Rates
Electronic Trading at BofAML) and Brian Callahan (Head of US Par Loan Trading
and the head of Electronic Initiatives for Global Credit and Special Situations at
BofAML).
• Electronification of fixed income markets steadily growing; however, lag
European market. Electronic trading came to fixed income trading in the late
1990’s as a way of automating transactions (i.e. create a more efficient process
between parties). Today in the US, the investment grade market is 16-20%
electronic, the high yield market is 8% (has doubled over the last few of years), the
treasury market (which has been growing steadily over last 10-15yrs) is 80-90% of
the actual trade count is electronic. While the electronification of the derivative
market was slower to evolve, recent regulatory reform has accelerated the
electronification process (50% today). That said, while the evolution towards
electronification in the US continues to grow, the European bond market is actually
more advanced with nearly 50% of the bond market automated (vs. 20% for the
US).
• Regardless of possible regulatory relief, electronification may slow but won’t
end entirely. While a partial repeal or lightening of Dodd-Frank would be a net
positive for the financial markets, and possibly lower the costs to banks and endusers,
Mr. Brown doesn’t see a dramatic effect on the market structure. In other
words, regulatory relief may only slow down the electronification progress.
• Electronification within the fixed income market is a modest priority among
asset managers. Fifty-two percent (52%) of the audience polled believe it to be a
modest priority in their own corporate strategy to embrace new
technologies/electronification in fixed income. Mr. Brown was not surprised by the
results as many of the asset managers have their own constraints from technology
funding to regulatory issues to running the day-to-day business. While
60 2016 Future of Financials Conference | 17 November 2016
electronification is something that pays dividends, these benefits occur over time.
That said, general sentiment from asset managers is that electronification is
something they want as it leads to efficiency.
Chart 90: As you think about corporate strategy for asset managers, how open is your firm with
embracing new technologies/electronification in the fixed income space?
60%
50%
52%
40%
30%
20%
19%
29%
10%
0%
Top priority in corporate
strategy
Modest priority in corporate
strategy
Low priority in corporate
strategy
Source: BofA Merrill Lynch Global Research
• ETF market for fixed income securities expected to grow significantly. Unlike in
the equities market where ETFs are 7% of the volume traded, fixed income ETFs
are still sub-1% (0.8% at YE15). As the market continues to grow, particularly in the
asset classes where the underlying bonds aren’t that liquid, Mr. Callahan noted
seeing increased liquidity in the ETFs for liquidity reasons. Following in the
footsteps of the equities market, Mr. Callahan expects the fixed income ETF market
to grow significantly and be very impactful to the overall market structure.
• Greater concern around speed at which liquidity can change vs. liquidity in the
market. There is a lot of concern around liquidity in fixed income markets. That
said, Mr. Brown is more concerned with the speed at which liquidity can change.
There has been growing evidence that the market is going to adjust greater and
faster than the underlying fundamental reasons for the correction. As such, this is
causing participants to revisit how they look at risk management. Now market
participants need to take into account not only their behavior, but their reaction to
other participants’ behavior (i.e. contagion effect).
• Fewer, well-established platforms reduce overall risk within system. Eighty-nine
(89%) percent of the audience polled prefer to conduct business with a few, wellestablished
platforms to diminish risk within the system. Using the government
bond market as an example, Mr. Olesky points out that the growing contribution
from PTFs to the overall treasury trade volume has increased the risk outside the
primary-dealer system. This is a risk Mr. Olesky believes needs to be addressed and
prefers a central clearinghouse for fixed income transactions.
2016 Future of Financials Conference | 17 November 2016 61
Chart 91: As you think about platform management, what is your view on having multiple options of
liquidity providers?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
11%
Prefer to have a material amount of options
89%
Prefer to conduct business with a few, wellestablished
platforms
Source: BofA Merrill Lynch Global Research
62 2016 Future of Financials Conference | 17 November 2016
Table 1: PO Changes
Firm Rating QRQ Current Price Old PO New PO
ASB UNDERPERFORM B-3-7 $22.45 $19.00 $20.00
BANC NEUTRAL C-2-7 $14.80 $18.50 $15.50
BBT BUY B-1-7 $42.82 $41.00 $45.00
BKU BUY C-1-7 $34.19 $36.00 $37.00
BOH UNDERPERFORM B-3-7 $85.67 $64.00 $75.00
C BUY B-1-7 54.63 $55.00 $60.00
CBF BUY C-1-7 $35.80 $35.00 $38.00
CBSH NEUTRAL A-2-7 $56.39 $53.00 $60.00
CFG BUY B-1-7 $30.73 $28.00 $33.00
CFR UNDERPERFORM B-3-7 $82.93 $70.00 $74.00
CMA UNDERPERFORM B-3-7 $59.21 $49.00 $55.00
EWBC BUY B-1-7 $45.64 $45.00 $50.00
FBP NEUTRAL C-2-9 $6.29 $6.00 $6.50
FCB BUY C-1-9 $39.75 $44.00 $44.00
FHB NEUTRAL C-2-7 $29.48 $28.00 $31.00
FHN UNDERPERFORM B-3-7 $17.97 $14.50 $16.00
FITB NEUTRAL B-2-7 $24.90 $23.00 $26.00
FSB NEUTRAL C-2-9 $33.80 $40.00 $36.00
GS BUY B-1-7 $206.26 $195.00 $230.00
GWB BUY B-1-7 $38.85 $38.00 $42.00
HBAN BUY C-1-7 $11.93 $12.00 $13.00
HBHC NEUTRAL B-2-7 $39.05 $35.00 $41.00
IBKC BUY B-1-7 $78.05 $74.00 $85.00
JPM BUY B-1-7 77.40 $74.00 $83.00
KEY BUY B-1-7 $16.73 $17.00 $18.00
MS BUY B-1-7 $39.19 $36.00 $43.00
NYCB BUY C-1-8 $15.36 $17.00 $17.00
PB UNDERPERFORM B-3-7 $64.38 $50.00 $58.00
PNC BUY B-1-7 $107.51 $100.00 $110.00
RF NEUTRAL B-2-7 $12.89 $11.00 $13.00
SBNY BUY B-1-9 $147.02 $140.00 $160.00
SIVB BUY B-1-9 $147.35 $140.00 $165.00
SNV NEUTRAL C-2-7 $38.01 $35.00 $40.00
STI BUY B-1-7 $50.79 $48.00 $53.00
TCB UNDERPERFORM B-3-7 $16.23 $13.50 $14.00
TCBI NEUTRAL C-2-9 $70.75 $62.00 $74.00
UMBF BUY B-1-7 $72.04 $65.00 $78.00
USB NEUTRAL B-2-7 $47.87 $45.00 $50.00
WFC BUY B-1-7 51.68 $50.00 $55.00
ZION UNDERPERFORM C-3-7 $37.46 $30.00 $36.00
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 63
Price objective basis & risk
AllianceBernstein (AB)
Our $25 price objective is based on 13x target P/E on our '17E, a discount vs our target
for asset managers as a group, based on improving but inconsistent flows and limited
active equity exposure as well as the MLP structure which means less liquidity, though a
high distribution. Upside/downside risks to our price objective are market
appreciation/depreciation, similar to other asset managers, underperformance, and an
unpredictable yield since it is based on earnings rather than fixed. Because Alliance is an
MLP, total potential return includes a variable distribution based on earnings.
Amer Express (AXP)
Our $74 price objective reflects a 13x PE multiple to our 2017 EPS estimate. Given the
elevated uncertainty, we expect AXP will trade near the low end of its historical
valuation range, which averages 12x-16x. This multiple reflects our view of solid loan
growth and better billings, offset by increased risks of rising credit and marketing costs.
We think the market will view AXP through a more credit card lens in the near-term,
which also supports a multiple at the low end of the historical range.
Upside risks to our PO are stronger than expected macroeconomic conditions,
accelerating consumer and business spending, lack of disruptions in capital markets, or a
decreasing regulatory burden. Downside potential could come from weaker than
expected macroeconomic conditions and renewed recessionary pressure, softer
consumer and business spending, disruptions in capital markets, or an increasing
regulatory burden.
Ares Management (ARES)
Our price objective (PO) for Ares is $18, which implies a target price-to-ENI (P/ENI or
P/E) multiple of 11x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts
(SOTP) analysis. Our SOTP analysis includes the following components: a
target multiple on fee related earnings (15x - in line with or a premium to asset
manager multiples given healthy growth and sticky assets), book value for the balance
sheet investments and accrued carry, and a discounted value on the performance fee
upside over a cycle (1.3x MOIC). Based on this method, we value the fee related
earnings at $13/unit, the balance sheet (principal investments and accrued carry) at
$4/unit, and the discounted value of future carry income and investment income at
$1/unit, which equates to a total value of $18.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, legal and political risk, increased
regulation, credit market disruptions, poor performance, weak fundraising, expansion
risk, key person and talent risk, competition, a unique corporate structure that limits
unitholder control, and lock ups.
Associated Banc-Corp (ASB)
We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $20 price objective and assign a 1.4x multiple to 3Q17E TBV and a 14.9x 2017
P/E multiple, in-line with smid-cap peers due to their near median return profile. Our
DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. The
upside risk to our price objective is a less onerous residential RE cycle. Downside risks
are a double dip in housing prices, deteriorating energy portfolio and falling rental
income for commercial properties.
Banc of California (BANC)
To arrive at our $15.50 price objective, we have employed a three-factor valuation
methodology that incorporates target P/E, target P/TBV and a DCF model. For our P/E
analysis, we use a 14x earnings multiple on BANC's 2017E core earnings below peer
64 2016 Future of Financials Conference | 17 November 2016
multiples due to lagging EPS growth. For our P/TBV valuation, we apply a 1.2x tangible
book multiple to BANCs 2Q17E tangible book below peer multiples due to lagging ROTE.
For our DCF analysis, we forecast net income growth stabilizes at 3% in the terminal
stage. We also assume a beta of 1.1x in the terminal stage.
Downside risks to our price objective are slower than expected loan growth, and a
reduction in the common dividend.
Bank of Hawaii Corp. (BOH)
We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $75 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to
peers, which we believe is appropriate given a stronger profitability and capital profile.
Our 17x multiple on 2017E EPS is equal to the the peer median given average EPS
growth relative to peers. Our DCF assumes a two-stage cost of capital of 9.8% and a
terminal growth rate of 3%.
Downside risks to our price objective are a longer-than-anticipated low rate
environment and a reversal of local economic improvement. Upside risks are a strongerthan-expected
economic rebound, better-than-expected capital distribution and a
shorter-than-anticipated low rate environment.
BankUnited, Inc. (BKU)
To arrive at our $37 price objective, we have employed an equal-weighted three factor
valuation methodology that incorporates target P/TBV, P/E and DCF. We have applied a
target P/TBV value multiple of 1.5x on our 2Q17E TBV and a P/E target multiple of 16x
'17 EPS, based on BKU's above average growth relative to peers. Our DCF assumes a
two-stage cost of capital of 7.9% and 9.3% and a terminal growth rate of 6%.
Downside risks to our price objective are slower CRE loan growth on the back of
regulatory oversight, as well as an inability to deploy excess capital, increased
competition for Florida M&A and an inability to continue to implement an organic
growth strategy in New York City.
BB&T Corporation (BBT)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $45 PO
and assign a 1.6x multiple to 2017E TBV and 14.5x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our EPS multiple is in-line with BBT's historical avg, which reflects very high-growth
years in the 1990s, a pace unlikely to be achieved near term given BBT's size as well as
the challenging macro backdrop and industry headwinds. Our DCF assumes a two-stage
cost of capital of 9.7% and 10.9% and a terminal growth rate of 4%.
Risks to our price objective are macro risks such as a double dip recession, the
implementation of a strict liquidity coverage ratio and further regulation on overdraft
income that restricts bank profitability. Specific to BBT, risks are enhanced regulatory
scrutiny and capital standards as a Domestic SIFI, the announcement of a large,
expensive deal, and the risk that the NPBC transaction does not consummate.
Capital Bank Financial Corp. (CBF)
Our $38 PO is based on an equal-weighted, two-factor valuation methodology that
assumes: We assumes a 20.0x P/ 2017e EPS and a target P/TBV of 1.6x to 2017E
tangible book given our forecast above peer EPS growth.
Downside risks to our PO are an inability to deploy excess capital and create value
through acquisitions.
2016 Future of Financials Conference | 17 November 2016 65
Citigroup Inc. (C)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO,
assigning a 0.9x multiple to 2017E TBV and 11x multiple on '17E blended NA and EM
earnings. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF
analysis by 20%.
Near term, we view C's current market multiple as overly discounted, but expect money
center banks will likely continue to trade at a discount to the regionals. Our 1x TBV
multiple represents a 0.3x discount to our median multiple for our universe. Our
discount to TBV is a reflection of the earnings drag from Holdings and the fact that
money centers will most likely continue to trade at a discount to regional peers. Our 11x
16E multiple is based on a sum of the parts analysis, where we apply a 10.5x multiple,
on all operations ex. Lat Am and Asia GCB. We then apply a 11x multiple on Lat Am and
Asia GCB to represent the earnings growth for consumer banking in emerging markets.
Lastly, we deduct the earnings drag from Holdings. Our DCF analysis assumes a 5%
growth rate and two stage cost of equity of 13%.
Risks to our PO are macro risks such as a slower than expected rate of fed hikes, and
economic downturn and further scrutiny of the financials industry. Specific to C, risks
are enhanced regulatory and capital standards as a Global SIFI, slower wind-down on Citi
Holdings than expected, and slower-than-expected growth in the emerging markets and
potential fines.
Citizens Financial Group (CFG)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $33 price
objective and assign a 1.2x multiple to our 2017E TBV in-line with other asset sensitive
peers. We place a 15x multiple on our 2017E EPS, also in-line with its asset sensitive
peer group. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 5%.
Downside risks to our price objective are: 1) a significantly delayed Fed rate hike leading
to pressured revenue growth, 2) higher losses associated with CFG's consumer oriented
loan portfolio, and 3) a quicker than expected credit normalization.
Comerica Incorporated (CMA)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO,
and assign a 1.2x multiple to 2017E TBV (in line with the median energy-exposed peers)
and 16x multiple on 2017E EPS due to below peer EPS growth and ROTE. We have
weighted the P/E and P/TBV factors equally at 33%, and our DCF analysis by 33%. Our
DCF assumes a two-stage cost of capital of 12.3% and 10.5% and a terminal growth
rate of 5% and Tier 1 common of 8% at termination.
Downside risks to our PO are a more severe than expected impact from lower energy
prices, or a slower than expected rate of fed hikes. Upside risks are a better than
expected rebound in energy prices and sooner recognition of cost saves.
Commerce Bancshares Inc. (CBSH)
We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $60 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to
peers, given higher-quality earnings and capital position. Our assigned 18x multiple on
2017E EPS is at a premium to peers due to higher earnings quality. Our DCF assumes a
terminal cost of equity of 9%, and a terminal growth rate of 3%.
Downside risks to our price objective are regulatory headwinds, or longer-thananticipated
low-rate environment. Upside risks are a stronger-than-expected economic
rebound, better-than-expected capital distribution and a potential takeout above our
price objective.
66 2016 Future of Financials Conference | 17 November 2016
Cullen/Frost Bankers Inc (CFR)
To arrive at our $74 price objective, we employed a three-factor valuation methodology
that incorporates target P/E, target P/TBV and a DCF model. For our P/E valuation, we
apply a 15x earnings multiple on CFR's 2017E core earnings. For our P/TBV valuation,
we apply a 1.7x tangible book multiple to CFR's 2017E tangible book. Both multiples are
lower than peers for CFR due to EPS headwinds and rising credit costs from lower
energy prices. For our DCF analysis, we use a net income growth of 3.0% and assume a
beta of 1.0 in the terminal stage.
Upside risks to our PO: a sharp rebound in oil prices, higher than expected interest rates,
stronger loan growth, better than expected credit performance of CFR's energy loan
portfolio. Downside risks: A worse than expected decline in Texas economic growth that
impacts CFR's balance sheet growth, a slower than expected pace or rate hikes and a
worse than expected sell off in oil prices.
East West Bancorp, Incorporated (EWBC)
Our three-pronged valuation methodology (target P/E, target P/TBV, and DCF analysis)
drives our price objective of $50. We assumes a 16.0x P/ 2017e EPS and a target P/TBV
of 2.0x to 2Q17E tangible book given our forecast above peer EPS growth. Our DCF
assumes a two-stage cost of capital of 9.5% and a terminal growth rate of 3% Upside
risks to our PO are a quick economic recovery (led by stabilization or appreciation in CA
housing values) or a faster than expected recovery in China. Downside risk to our PO is
an even deeper economic slowdown driving corporate losses higher than we currently
anticipate, faster than expected normalization in credit.
Eaton Vance (EV)
Our $35 price objective is based on a target P/E of 15x calendar 2016E (14x '17E), at a
discount to our asset-manager group target multiple, given recent outflows from high
fee products, offset by distinct products in areas such as floating rate and overlay.
Downside risks to our price objective are market depreciation and investment underperformance,
as for all asset managers, and (should the economy slow) concentration in
some credit areas, such as bank loan funds, high yield and longer-duration munis. Upside
risks are improving performance, flows, or future traction from EV's ETF licensing
initiative.
FCB Financial Holdings, Inc (FCB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $44 price
objective and assign a 1.6x multiple to our 2017E TBV given that we believe the market
would pay a 0.3x premium for FCB's 2016 estimated returns in line with the median
premium of its peer group (Florida banks, High Growth, Bank Acquisition, and SMIDs).
We place a 18x multiple on our 2017E EPS, a premium to its SMIDs peers given our
outlook for stronger EPS growth. Our DCF assumes a two-stage cost of capital of 10%
and a terminal growth rate of 3%.
Downside risks to our price objective are a deterioration in credit quality in FCB's
unseasoned newly originated loan portfolio, a downturn in the Florida economy, and
continued competition for C&I loans. Upside risks are a better than expected
improvement in its return profile and a much stronger economic improvement in the
Florida economy.
Fifth Third Bank (FITB)
Our PO of $26 is predicated on target P/E multiple of 15x to reflect higher confidence
in FITB achieving most of its profit improvement goals related to Project North Star.
This represents a modest premium versus peers. Downside risks to our PO are a
prolonged low interest rate environment, expensive M&A and slower than guided loan
growth on weaker economic activity.
2016 Future of Financials Conference | 17 November 2016 67
First Bancorp Puerto Rico (FBP)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $6.50 price
objective. We assign a 1.0x multiple to our 2Q17E TBV, below the 1.6X for peers, due to
the overhang of PR fiscal issues that may reduce TBV. Our revised implied 2Q17E TBV
of 1.0x is consistent with a 5% ROE. We assign a 10x multiple to our 2017E EPS, in line
with peers. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 3%.
Downside risks to our price objective are a worse-than-expected restructuring of PR
government debt, deterioration in the Puerto Rican economy that could hurt the ongoing
credit and earnings recovery at FBP, a change in management's strategy to dispose
troubled assets, and potential regulatory risk stemming from the ongoing
implementation of the Dodd-Frank financial rules. Upside risks to our price objective are
a much stronger economic improvement in Puerto Rico and a better-than-expected
improvement in asset quality trends at FBP.
First Hawaiian Inc. (FHB)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $31 PO
and assign a 2.2x multiple to 2017E TBV and 17x multiple on 2017E EPS, representing
premium target multiples for the median smid-cap banks under coverage. We have
weighted the P/E and P/TBV factors equally.
A superior profitability profile suggests an above peer multiple. Our DCF assumes a twostage
cost of capital of 8% and a terminal growth rate of 4%.
Risks include 1) FHB's reliance on the Hawaiian economy with 80% of the franchise
spread across Hawaii, Guam, and Saipan poses downside risk to EPS from a severe
economic downturn in this region. 2) While FHB has a history of conservative
underwriting its exposure to auto loans could serve as an overhang if investor concerns
around the health of the auto sector and consumer increase. 3) Expectations for
continued divestiture by French bank BNP (owns 82% of shares o/s) could temper stock
performance.
First Horizon National Corp. (FHN)
We use a three-prong valuation framework (P/E, P/TBV, DCF) to arrive at our $16 price
objective and assign a 1.5x multiple to 2Q17E TBV and a 14x multiple to 2017E EPS
(inline with median for our mid-to-small cap universe). We believe that this valuation
discount is warranted given the below average earnings growth that we forecast for
FHN. Our P/TBV and P/E targets reflect our expectation that earnings growth and
profitability will remain challenged by a low growth low interest rate environment. Our
DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%.
Downside risks to our price objective are a double dip in home prices and slower
residential real estate recovery. Upside risks are FHN being taken out above our price
objective and better performance in the economy than we expect.
Franklin Financial Network, Inc. (FSB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $36 price
objective and assign a 1.8x multiple to our 2Q17E TBV, given that we believe the market
would pay no premium for FSB's 2016 estimated returns of 14%, below the median of
its peer group (High performing, Southeast peers, and SMIDs). We place a 14x multiple
on our 2017E EPS, a premium to its peer group given above average expected EPS
growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 3%.
Downside risks to our price objective are: 1) execution risk leading to slower than
expected loan growth or lower than expected improvement in the efficiency ratio, 2)
68 2016 Future of Financials Conference | 17 November 2016
downturn in the local real estate markets affecting Franklin's construction loans and
increasing credit costs via higher charge-offs and provisions, and 3) inability to
effectively fund asset growth driving greater than expected compression in the net
interest margin.
Goldman Sachs (GS)
We value the brokers based on the relationship between ROE (return on equity) and PB
(price to book), which has a high historical correlation. Our $230 PO is based on a target
PB multiple of 1.2x our forward book value estimate, which is above our 2017E ROE of
roughly 10% as we add in higher interest rate expectations and loosening regulations
into our multiple.
Risks to the downside are a weaker economy/capital markets, increased macro issues,
tougher regulation, and litigation, while risks to the upside are a stronger economy,
moderating macro risks, market share gains, and less onerous regulatory and legal
issues.
Great Western Bancorp Inc (GWB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $42 price
objective and assign a 2.0x multiple to our 2Q17E TBV given that we believe the market
would pay premium for GWB's 2016 estimated returns of 15%, in line with the median
premium of its peer group (High performing, Midwest peers, and SMIDs). We place a 16x
multiple on our 2017E EPS, a premium to its peer group given higher quality earnings.
Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%.
Downside risks to our price objective are a prolonged downturn in the farm sector and
lower for longer interest rate environment. Upside risks are a better than expected
improvement in the farming industry and a much stronger economic improvement in the
Midwest economy.
Hancock Holding (HBHC)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $41 price
objective. We assign a 1.5x multiple to our 2Q17E TBV, in line with SMID-cap peers
based on their in-line return profile, and this translates to $35.75. We place a 14.5x
multiple on our 2017E EPS, in line with other peers based on forecasted EPS growth, for
$33. Our DCF assumes a two-stage model with terminal growth rate of 3.5% and a cost
of capital of 8.5% to derive our $35 PO.
Downside risks to our price objective are regulatory issues, slowing growth and if M&A
synergies do not materialize. Upside risks are better than expected cost saves, stronger
loan growth that would lead to better than forecast spread revenue and lower credit
costs.
Huntington Bancshares Inc. (HBAN)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $13
and assign a 1.8x multiple to 2017E TBV and a 14x multiple on 2017E EPS, below
historical multiples. This is due to more stringent capital standards and the negative fee
income impact of pending regulatory reform. Our DCF analysis uses a cost of equity of
15.7% in the first stage and 11% in the second stage, and a terminal growth rate of 3%.
Risks to our price objective are an inability to offset regulatory fee income headwinds
and integration risk associated with FMER. Other risks are an inability to return capital
to shareholders in a timely fashion or overpaying for an acquisition target.
IBERIABANK Corp (IBKC)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $85 price
objective and assign a 1.6x multiple to our 2Q17E TBV, in line with multiples of other
2016 Future of Financials Conference | 17 November 2016 69
high growth peers. We place a 16x multiple on our 2017E EPS in line with SMID peers.
Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%.
Downside risks to our price objective are worse than expected decrease in oil prices,
regulatory issues, deteriorating credit quality, and if M&A synergies do not materialize.
Upside risks are sooner than expected recovery in the oil price, faster than expected rate
hikes or better than expected improvement in the US economy.
Invesco (IVZ)
Our $36 price objective is based on a target P/E multiple of 14x our 2017E, which is
above IVZ's historical valuation relative to the group given expectations for superior
organic growth. Risks to our price objective are market depreciation and investment
underperformance, as for all asset managers, along with volatile flows in IVZ's passive
strategies, non-US currency and market risk.
JPMorgan Chase & Co. (JPM)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $83 PO,
assigning a 1.5x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Near term, we view JPM's current market P/E multiple as overly discounted, but expect
money center banks will likely continue to trade at a discount to the regionals. Our 11x
multiple is a 2x discount to our median multiple as we believe in the near future, money
centers will continue to trade at a discount to regional peers. Our DCF assumes a twostage
cost of capital of 10% and a terminal growth rate of 4%.
Risks to our price objective are macro risks such as a longer than expected low interest
rate environment and further regulation and scrutiny of the financials industry. Specific
to JPM, risks are enhanced regulatory and capital standards as a Global SIFI, mortgage
putback risk, material decline in investment banking/trading profitability, and increased
litigation on matters such as private label securitization, foreclosures, etc.
Key Corp (KEY)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $18 PO
and assign a 1.4x multiple to 2017E TBV and 15x multiple on 2017E EPS, in-line with its
peer group due to near median profitability and EPS growth. Our DCF assumes a two
stage cost of capital of 13.4% and 10.9% and a terminal growth rate of 5% and Tier 1
common of 8% at termination.
Downside risks to our PO are a prolonged low interest rate environment, greater than
expected expenses, inability to maximize balance sheet efficiency, and the
announcement of expensive deals.
KKR & Co. (KKR)
Our price objective (PO) for KKR is $17, which results in a target price-to-ENI (P/ENI or
P/E) multiple of 10x our 2017 economic net income (ENI) estimate. Our price objective
is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the
following components: a target multiple on fee related earnings (11x - discount to asset
manager multiples given revenue mix), a discount to book value for the balance sheet
investments and accrued carry given markets, and a discounted value on the
performance fee upside over a cycle. Based on this method, we value the fee related
earnings at $6/unit, the balance sheet (principal investments and accrued carry) at
$9/unit, and the discounted value of future carry income and investment income at
$2/unit, which equates to a total value of $17, in line with our price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, regulatory and political risk, poor
70 2016 Future of Financials Conference | 17 November 2016
performance, weak fundraising, principal investment and balance sheet risk, expansion
risk, key person and talent risk, competition, a unique corporate structure that limits
shareholder control, and share lock-ups that could weigh on the stock.
Legg Mason (LM)
Our $36 price objective is based on a target P/E multiple of 12x our calendar '17E, a
discount to the group, given financial leverage, muted flows, and deal/integration risk.
Downside risks to our price objective: an equity sell-off or weakening flows, which
would pressure AUM and revenues. A return to past under-performance at key affiliates
is also a risk for Legg, given its fragile recovery and brand issues. Given their affiliate
model there are integration risks. Upside risks to our price objective are better than
expected equity markets, performance, or flows, or an accretive acquisition.
Morgan Stanley (MS)
We value the brokers based on the relationship between ROE (return on equity) and PB
(price to book), which has a high historical correlation. Our $43 PO is based on a target
PB multiple of 1.3x our forward book value estimate, which is above our 2017E ROE of
roughly 8% as we add in higher interest rate expectations and loosening regulations into
our multiple.
Risks are a weak economy, low rates for longer, a significant reduction in capital
markets activity, weak returns, another shock to the financial system, ongoing
competition and talent risk, tighter regulation, significantly higher capital requirements,
and ongoing litigation risks.
New York Community Bancorp (NYCB)
Our price objective is $17 and we use a three factor valuation model equally weighing
valuations using P/E, P/TBV and DCF models. To arrive at our P/E valuation, we assign a
14x multiple to our blended '17e EPS or inline with the median of other CCAR banks
with $50-100bn in assets. To arrive at our P/TBV valuation we applied a 2.2x multiple to
our 2Q17E TBV, a premium to NY/Thrift and smid cap peers given NYCB's superior
return profile. We arrive at our DCF valuation using we assume a 2% terminal growth
rate and a WACC of 8%.
Upside risks to our price objective are: 1) Change in SIFI threshold could drive a relief
rally, 2) Lower for longer rate backdrop, and 3) A period of heightened market volatility.
Downside risks to our price objective are: 1) worse than expected impact on ROTE from
increased capital standards from obtaining the SIFI designation and 2) higher than
expected impact from increasing rates on funding cost.
Prosperity Bancshares Inc (PB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $58 price
objective. We assign a 1.8x multiple to our 2Q17E TBV (40% weight) compared to 1.1x
median of TX peers. We believe the 0.7x premium to Texas peers is warranted given
PB's above average return on tangible equity (ROTE) profile. We place a 14x multiple on
2017E EPS, in line with historical P/E median (40% weight) net of accretable yield. Our
DCF valuation ((20% weight) suggests a fair value of $45. Our DCF assumes a terminal
growth rate of 3% and cost of capital of 9.9%.
Risks to our price objective are worse than expected drop in the price of oil, better than
expected macro environment and increasing rates which offset the effects of lower oil
prices, or inability to close an M&A deal due to regulatory or capital constraints.
Regions Financial (RF)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $13 price
objective and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS. Our
2016 Future of Financials Conference | 17 November 2016 71
estimates imply RF would generate ROTEs of 10-11% in 2016-2017E, hence we find RF
fairly valued at 1.3x TBV. Our 13x multiple is in-line with large regional peers. Our DCF
assumes a two-stage cost of capital of 13.6% and 10.5% and a terminal growth rate of
6.5% and Tier 1 common of 8% at termination.
Downside risks to our PO are a slower-than-expected credit recovery, and the Fed on
hold for a longer period of time.
Signature Bank (SBNY)
We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $160 PO and assign a 2.1x multiple to 3Q17E TBV, representing a premium to the
group, which we believe is appropriate given a stronger profitability and capital profile,
and above-peer-growth prospects. Our 16.1x multiple on 2017E is higher than peers
given consistent above peer growth. Our DCF assumes a two-stage cost of capital of
10% and a terminal growth rate of 4%.
Risks to our price objective are required provisioning at higher-than-forecast levels,
further deterioration in rental income for commercial properties, and a longer-thananticipated
low-rate environment.
SunTrust Banks, Inc. (STI)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $53 PO,
assigning a 1.7x multiple to 2017E TBV and 14.5x multiple on 17E EPS. Above peer
P/TBV due to their above median profitability, and below peer P/E due to their below
median EPS growth. We have weighted the P/E and P/TBV factors equally at 40%, and
our DCF analysis by 20%.
Our DCF assumes a two-stage cost of capital of 12% and a terminal growth rate of 4%.
Risks to our price objective are macro risks, such as a slower than expected rate
increase. Upside risks are higher-than-expected capital return, a general beta rally for
bank stocks, and faster recognition of "normalized" earnings.
SVB Financial Group (SIVB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $165 price
objective and assign a 1.8x multiple to our 2Q17E TBV and apply a 17x P/E to 17E EPS.
Our valuation multiples are both in line with high growth peers due to SIVB's high
profitability and EPS growth profile. Our DCF assumes a two-stage cost of capital of
9.5% and a terminal growth rate of 6%.
Downside risks are a longer than expected low rate environment and a slowdown in the
technology sector and related IPO activity. Upside risks are sooner than expected rate
hike, or better than expected pickup in the tech sector.
Synovus Financial Corp. (SNV)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $40 price
objective and assign a 1.7x multiple to our forward 2Q17 TBV, given peers are currently
trading higher and a discount is warranted given their lower return profile. We place a
15x multiple on 2017E EPS, in line with the historical median for the stock. Our DCF
assumes a two-stage cost of capital of 9%, and a terminal growth rate of 3%.
Downside risks to our price objective are potentially slower-than-expected economic
growth in their footprint or a potential takeout price that is lower than where the stock
is trading today. Upside risks to our price objective are a quicker pick-up in capital return
than we are expecting and SNV being acquired above our price objective.
TCF Financial Corp. (TCB)
72 2016 Future of Financials Conference | 17 November 2016
We use an equal weighted, three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our PO of $14. We assigned a 1.2x multiple to 2Q17E TBV and a 12x multiple on
2017E EPS, with lower PTBV/PE multiple than peers assigned due to the higher
perceived risk of their lending model. Our DCF assumes a two-stage cost of capital of
9.4% and 11.5% and a terminal growth rate of 2%.
Upside risk to our price objective is a less onerous residential real estate cycle favorably
benefiting credit provision forecasts. Downside risks are a double dip in home prices
and a prolonged low rate environment.
Texas Capital Bancshares Inc. (TCBI)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $74 price
objective and assign a 1.7x multiple to our 2Q17E TBV, below high growth peers due to
possible losses as a result of the downturn in energy prices. We place a 17x multiple on
our 2017E EPS, below TCBI's historical pre-crisis P/E multiple based on possible EPS
headwinds from their energy exposures. Our DCF assumes a two-stage cost of capital of
10% and a terminal growth rate of 4%.
Downside risks to our price objective are lower than expected oil prices and a slowdown
in economic activity in Texas. Upside risk to our price objective is better than expected
ramp up in MCA business, and sooner than expected hike in rates, faster than expected
recovery in oil prices.
The Blackstone Group (BX)
Our price objective (PO) for Blackstone is $29, which results in a target price-to-ENI
(P/ENI or P/E) multiple of 12x our 2017 ENI estimate. Our price objective is based on
our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following
components: a target multiple on fee related earnings (16x - roughly in line with or a
premium to top tier asset manager multiples given healthy growth and sticky assets),
book value for the balance sheet investments and accrued carry, and a discounted value
on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value
the fee related earnings at $14/unit, the balance sheet (principal investments and
accrued carry) at $6/unit, and the discounted value of future carry income and
investment income at $9/unit, which equates to a total value of $29, in line with our
price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, legal and political risk, increased
regulation, poor performance, weak fundraising, expansion risk, key person and talent
risk, competition, and a unique corporate structure that limits unitholder control.
The Carlyle Group (CG)
Our price objective (PO) for Carlyle is $18, which implies a target price-to-ENI (P/ENI or
P/E) multiple of 13x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts
(SOTP) analysis. Our SOTP analysis is based on the following components: a
target multiple on fee-related earnings (16x, roughly in line with or a premium to asset
manager multiples given growth outlook), book value for the balance sheet investments
and accrued carry, and a discounted value on the performance fee upside over a cycle
(1.5x MOIC). Based on this method, we value the fee-related earnings at $4 share, the
balance sheet at $5 share, and incentive upside at $9 share, which equates to a total
value of $18, in line with our price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in
carried interest and partnership tax laws, regulatory and political risk, poor performance,
weak fundraising, expansion risk, key person and talent risk, competition, a unique
corporate structure that limits shareholder control, a limited float, and share lock-ups
that could weigh on the stock.
2016 Future of Financials Conference | 17 November 2016 73
The PNC Financial Services Group, Inc. (PNC)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $110 PO
and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS, in line with
target multiples for the median large regional banks under coverage. We have weighted
the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
A superior profitability profile suggests an above peer multiple - however, a challenging
macro backdrop and specific industry headwinds restrain our P/E target. Our DCF
assumes a two-stage cost of capital of 9.6% and 11.2% and a terminal growth rate of
4%.
Risks are macro risks such as a lower for longer rate environment, the implementation
of a strict liquidity coverage ratio and further regulation on overdraft income that
restricts bank profitability.
U.S. Bancorp (USB)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $50 PO,
assigning an above peer 2.8x multiple to 2017E TBV and near median 14.5x multiple on
2017E EPS due to their above median profitability. We have weighted the P/E and
P/TBV factors equally at 40%, and our DCF analysis by 20%. Our DCF assumes a twostage
cost of capital of 9.5% and 10.9% and a terminal growth rate of 5%.
Risks to our price objective are macro risks such as a double dip recession, the
implementation of a strict liquidity coverage ratio and further regulation on overdraft
income that restricts bank profitability. Specific to USB, risks are enhanced regulatory
scrutiny and capital standards as a Domestic SIFI and an announcement of a large
expensive deal that could weigh on the stock price.
UMB Financial Corporation (UMBF)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $78 price
objective and assign a 1.8x multiple to our 2Q17E TBV, in-line with peers, and we place
a 18x multiple on our 2017E EPS, above peers given our above median EPS growth
forecast. Our DCF model assumes cost of equity of 8% and a terminal growth rate of
4%.
Downside risks to our price objective are continued rising long rates, which could
negatively impact the company's sizable securities book and erode tangible book value.
In addition, a sudden outflow of deposits could impact EPS and the asset sensitivity of
UMBF's balance sheet to higher interest rates. Upside risks to our price objective are a
much faster asset mix change into higher yielding loans that significantly increases its
net interest margin.
Wells Fargo & Company (WFC)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO,
assigning a 1.75x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 1.6x TBV multiple represents a 0.3x premium to our mega-cap median multiple, but
we believe this is justified due to WFC's superior returns on tangible equity (ROTE
consistent between 13%-14% throughout our forecast period, versus 12% for peers).
Our 12x EPS multiple is in line with our mega-cap median multiple. We believe WFC
deserves to trade at a premium due to better earnings growth, but we are assuming
WFC trades in line with peers due to a higher percentage of earnings from mortgage
banking and accretable yield, as well as potentially greater regulatory scrutiny as the
second largest US depository. Our DCF assumes a two-stage cost of capital of 11% and
a terminal growth rate of 4%.
74 2016 Future of Financials Conference | 17 November 2016
Downside risks to our price objective are an economic slowdown and the final
implementation of a strict liquidity coverage ratio. Specific to WFC, risks are enhanced
regulatory scrutiny and capital standards as a Global SIFI, and issues surrounding its
cross selling.
Zions Bancorp (ZION)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $36 price
objective and assign a 1.2x multiple to 2017E TBV. Our 16x P/E multiple, which we apply
on 2017E EPS along with debt extinguishment upside, is 1x higher than its historical
median due to low interest rates. Our DCF assumes a two-stage cost of capital of
16.1% and 11.6% and a terminal growth rate of 8%.
Upside risks to our price objective are more robust economic recovery and less onerous
post cycle reserve requirements. Downside risks are a slowdown in housing price
appreciation and a prolonged low interest rate environment.
Analyst Certification
We, Erika Najarian, Ebrahim H. Poonawala, Kenneth Bruce and Michael Carrier, CFA,
hereby certify that the views each of us has expressed in this research report accurately
reflect each of our respective personal views about the subject securities and issuers.
We also certify that no part of our respective compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or view expressed in this research
report.
Special Disclosures
BofA Merrill Lynch is currently acting as financial advisor to KKR and the Company in
connection with its proposed sale of a majority stake in SMCP Group to Shandong Ruyi
Group. The signing of an exclusivity agreement between the parties was announced on
31 March 2016.
BofA Merrill Lynch is currently acting as financial advisor to Huntington Bancshares Inc
in connection with Huntington and FirstMerit Corp's proposed sale of 13 bank branches
in Stark and Ashtabula counties to First Commonwealth Bank, a subsidiary of First
Commonwealth Financial Corp, which was announced on July 27, 2016.
BofA Merrill Lynch is currently acting as financial advisor to Blackstone Group LP in
connection with its proposed acquisition of Team Health Holdings Inc, which was
announced on October 31, 2016. The proposed transaction is subject to approval by
shareholders of Team Health Holdings Inc. This research report is not intended to (1)
provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3)
result in the procurement, withholding or revocation of a proxy.
BofA Merrill Lynch is currently acting as financial adviser to Blackstone Real Estate
Partners Europe IV and Blackstone Real Estate Partners VIII (jointly “Blackstone”)
through its entity Vega Holdco Sarl in connection with a proposed offer to acquire a
controlling stake of D. Carnegie & Co. AB, which was announced on 15 July 2016. The
transaction will, if completed eventually result in Blackstone passing the threshold for a
mandatory offer obligation.
BofA Merrill Lynch is currently acting as financial advisor to Ares Capital Corp. in
connection with its proposed acquisition of American Capital, Ltd., which was
announced on May 23, 2016. Ares Management L.P. will provide financial support to the
transaction. The proposed transaction is subject to approval by shareholders of
American Capital ltd. and Ares Capital Corp. This research report is not intended to (1)
provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3)
result in the procurement, withholding or revocation of a proxy.
2016 Future of Financials Conference | 17 November 2016 75
US - Brokers, Asset Managers, & Exchanges Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Affiliated Mgrs. AMG AMG US Michael Carrier, CFA
AllianceBernstein AB AB US Michael Carrier, CFA
BlackRock, Inc. BLK BLK US Michael Carrier, CFA
Charles Schwab Corp. SCHW SCHW US Michael Carrier, CFA
CME Group CME CME US Michael Carrier, CFA
Cohen & Steers CNS CNS US Michael Carrier, CFA
Goldman Sachs GS GS US Michael Carrier, CFA
Houlihan Lokey HLI HLI US Michael Carrier, CFA
IntercontinentalExchange ICE ICE US Michael Carrier, CFA
Invesco IVZ IVZ US Michael Carrier, CFA
KKR & Co. KKR KKR US Michael Carrier, CFA
Legg Mason LM LM US Michael Carrier, CFA
Morgan Stanley MS MS US Michael Carrier, CFA
Oaktree Capital Group OAK OAK US Michael Carrier, CFA
Old Mutual Asset Management OMAM OMAM US Michael Carrier, CFA
TD Ameritrade AMTD AMTD US Michael Carrier, CFA
Apollo Global Management APO APO US Michael Carrier, CFA
Ares Management ARES ARES US Michael Carrier, CFA
E*TRADE Financial ETFC ETFC US Michael Carrier, CFA
Franklin Resources BEN BEN US Michael Carrier, CFA
Janus Capital JNS JNS US Michael Carrier, CFA
Nasdaq Inc NDAQ NDAQ US Michael Carrier, CFA
Och-Ziff OZM OZM US Michael Carrier, CFA
T. Rowe Price TROW TROW US Michael Carrier, CFA
The Blackstone Group BX BX US Michael Carrier, CFA
The Carlyle Group CG CG US Michael Carrier, CFA
WisdomTree WETF WETF US Michael Carrier, CFA
Artisan Partners APAM APAM US Michael Carrier, CFA
CBOE Holdings CBOE CBOE US Michael Carrier, CFA
Eaton Vance EV EV US Michael Carrier, CFA
Federated Inv. FII FII US Michael Carrier, CFA
Virtus Investment Partners VRTS VRTS US Michael Carrier, CFA
Waddell & Reed WDR WDR US Michael Carrier, CFA
Bats Global Markets, Inc. BATS BATS US Michael Carrier, CFA
76 2016 Future of Financials Conference | 17 November 2016
US - Specialty Financial Services Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
RVW
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Apollo Commercial Real Estate Finance ARI ARI US Kenneth Bruce
Ares Commercial Real Estate Corp. ACRE ACRE US Kenneth Bruce
Blackstone Mortgage Trust Inc BXMT BXMT US Kenneth Bruce
Compass Diversified Holdings CODI CODI US Derek Hewett
Ladder Capital Corp. LADR LADR US Kenneth Bruce
MGIC Investment Corp. MTG MTG US Mihir Bhatia
New Residential Investment NRZ NRZ US Kenneth Bruce
Radian Group Inc RDN RDN US Mihir Bhatia
Starwood Property Trust, Inc. STWD STWD US Kenneth Bruce
TCP Capital Corp. TCPC TCPC US Derek Hewett
TPG Specialty Lending, Inc. TSLX TSLX US Derek Hewett
AGNC Investment Corp AGNC AGNC US Kenneth Bruce
Ally Financial Inc. ALLY ALLY US Kenneth Bruce
Amer Express AXP AXP US Kenneth Bruce
Annaly Capital NLY NLY US Kenneth Bruce
CIT Group Inc. CIT CIT US Derek Hewett
Discover Financial Services DFS DFS US Kenneth Bruce
Golub Capital BDC, Inc. GBDC GBDC US Derek Hewett
MasterCard Inc MA MA US Kenneth Bruce
PayPal PYPL PYPL US Kenneth Bruce
PennyMac Financial Services, Inc. PFSI PFSI US Kenneth Bruce
Synchrony Financial SYF SYF US Kenneth Bruce
Visa Inc. V V US Kenneth Bruce
Apollo Investment Corporation AINV AINV US Derek Hewett
Capital One COF COF US Kenneth Bruce
Credit Acceptance Corp. CACC CACC US Kenneth Bruce
Essent Group ESNT ESNT US Mihir Bhatia
Goldman Sachs BDC, Inc. GSBD GSBD US Derek Hewett
OneMain Holdings, Inc. OMF OMF US Kenneth Bruce
PennyMac Mortgage Investment Trust PMT PMT US Kenneth Bruce
Santander Consumer USA Inc. SC SC US Kenneth Bruce
American Capital, Ltd. ACAS ACAS US Derek Hewett
Ares Capital Corporation ARCC ARCC US Derek Hewett
AG Mortgage Investment Trust, Inc. MITT MITT US Kenneth Bruce
ARMOUR Residential REIT, Inc ARR ARR US Kenneth Bruce
CYS Investments, Inc CYS CYS US Kenneth Bruce
Ellington Financial LLC EFC EFC US Kenneth Bruce
Hannon Armstrong HASI HASI US Kenneth Bruce
Invesco Mortgage Capital, Inc. IVR IVR US Kenneth Bruce
Two Harbors Investment Corp. TWO TWO US Kenneth Bruce
Western Asset Mortgage Corp WMC WMC US Kenneth Bruce
2016 Future of Financials Conference | 17 November 2016 77
US - Banks Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
BankUnited, Inc. BKU BKU US Ebrahim H. Poonawala
BB&T Corporation BBT BBT US Erika Najarian
Capital Bank Financial Corp. CBF CBF US Erika Najarian
Citigroup Inc. C C US Erika Najarian
Citizens Financial Group CFG CFG US Erika Najarian
East West Bancorp, Incorporated EWBC EWBC US Ebrahim H. Poonawala
FCB Financial Holdings, Inc FCB FCB US Ebrahim H. Poonawala
Great Western Bancorp Inc GWB GWB US Ebrahim H. Poonawala
Huntington Bancshares Inc. HBAN HBAN US Erika Najarian
IBERIABANK Corp IBKC IBKC US Ebrahim H. Poonawala
JPMorgan Chase & Co. JPM JPM US Erika Najarian
Key Corp KEY KEY US Erika Najarian
New York Community Bancorp NYCB NYCB US Ebrahim H. Poonawala
Signature Bank SBNY SBNY US Ebrahim H. Poonawala
SunTrust Banks, Inc. STI STI US Erika Najarian
SVB Financial Group SIVB SIVB US Ebrahim H. Poonawala
The PNC Financial Services Group, Inc. PNC PNC US Erika Najarian
UMB Financial Corporation UMBF UMBF US Ebrahim H. Poonawala
Wells Fargo & Company WFC WFC US Erika Najarian
Banc of California BANC BANC US Ebrahim H. Poonawala
Commerce Bancshares Inc. CBSH CBSH US Ebrahim H. Poonawala
Fifth Third Bank FITB FITB US Erika Najarian
First Bancorp Puerto Rico FBP FBP US Ebrahim H. Poonawala
First Hawaiian Inc. FHB FHB US Ebrahim H. Poonawala
Franklin Financial Network, Inc. FSB FSB US Ebrahim H. Poonawala
Hancock Holding HBHC HBHC US Ebrahim H. Poonawala
M&T Bank MTB MTB US Erika Najarian
Regions Financial RF RF US Erika Najarian
Synovus Financial Corp. SNV SNV US Ebrahim H. Poonawala
Texas Capital Bancshares Inc. TCBI TCBI US Ebrahim H. Poonawala
U.S. Bancorp USB USB US Erika Najarian
Associated Banc-Corp ASB ASB US Ebrahim H. Poonawala
Bank of Hawaii Corp. BOH BOH US Ebrahim H. Poonawala
Comerica Incorporated CMA CMA US Erika Najarian
Cullen/Frost Bankers Inc CFR CFR US Ebrahim H. Poonawala
First Horizon National Corp. FHN FHN US Ebrahim H. Poonawala
Prosperity Bancshares Inc PB PB US Ebrahim H. Poonawala
TCF Financial Corp. TCB TCB US Ebrahim H. Poonawala
Zions Bancorp ZION ZION US Erika Najarian
First Republic Bank FRC FRC US Erika Najarian
Disclosures
Important Disclosures
Equity Investment Rating Distribution: Banks Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 81 43.55% Buy 74 91.36%
Hold 45 24.19% Hold 41 91.11%
Sell 60 32.26% Sell 56 93.33%
78 2016 Future of Financials Conference | 17 November 2016
Equity Investment Rating Distribution: Financial Services Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 113 46.89% Buy 89 78.76%
Hold 66 27.39% Hold 55 83.33%
Sell 62 25.73% Sell 40 64.52%
Equity Investment Rating Distribution: Global Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1553 49.44% Buy 1130 72.76%
Hold 730 23.24% Hold 538 73.70%
Sell 858 27.32% Sell 514 59.91%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A
stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12
month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be
referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays
no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s
coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-Corp, Banc of
California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-West, Eaton
Vance, FCB Financial Holdin, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK,
Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial,
Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions.
MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: Ares Management, Assoc Banc-Corp, Banc of California, BB&T, Citigroup, First
Hawaiian Inc., Franklin Financial N, Goldman Sachs, Huntington Banc, IBERIABANK, KKR, Legg Mason, Regions Bank, SunTrust Banks, Wells Fargo.
The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-
Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, East-West, Eaton Vance, FCB Financial Holdin,
Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase,
KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S.
Bancorp, UMB Financial Corp, Wells Fargo, Zions.
MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: AllianceBernstein, Amer Express, Ares
Management, Assoc Banc-Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs,
Cullen/Frost Bankers, East-West, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Goldman Sachs, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase,
KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial
Corp, Wells Fargo, Zions.
The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-
Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-
West, Eaton Vance, Fifth Third, First Hawaiian Inc., First Horizon, Goldman Sachs, Hancock, Huntington Banc, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York
Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions.
MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-
Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Carlyle, Citigroup, Citizens Financial G, Comerica, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc.,
Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York
Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, Synovus, TCF, UMB Financial Corp, Wells Fargo, Zions.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months:
AllianceBernstein, Amer Express, Ares Management, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, East-
West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Hawaiian Inc., First Horizon, Goldman Sachs, Great Western Bancor, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp,
KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, SunTrust Banks, SVB Financial, Synovus, Texas Capital, U.S. Bancorp, UMB Financial Corp,
Wells Fargo, Zions.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the
ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of
the report: AllianceBernstein, BB&T, Blackstone Group, Carlyle, Citigroup, Citizens Financial G, Cullen/Frost Bankers, Eaton Vance, Fifth Third, Goldman Sachs, Great Western Bancor, Huntington
Banc, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, PNC, Regions Bank, SunTrust Banks, SVB Financial, TCF, U.S. Bancorp, Wells Fargo.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-
Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-
West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc,
IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB
Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions.
The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares
Management, Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost
Bankers, East-West, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP
Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp,
2016 Future of Financials Conference | 17 November 2016 79
UMB Financial Corp, Wells Fargo, Zions.
BofA Merrill Lynch Research Personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America
Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall
profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.
Other Important Disclosures
From time to time research analysts conduct site visits of covered issuers. BofA Merrill Lynch policies prohibit research analysts from accepting payment or reimbursement for travel expenses
from the issuer for such visits.
Prices are indicative and for information purposes only. Except as otherwise stated in the report, for the purpose of any recommendation in relation to: (i) an equity security, the price
referenced is the publicly traded price of the security as of close of business on the day prior to the date of the report or, if the report is published during intraday trading, the price referenced is
indicative of the traded price as of the date and time of the report; or (ii) a debt security (including equity preferred and CDS), prices are indicative as of the date and time of the report and are
from various sources including Bank of America Merrill Lynch trading desks.
The date and time of completion of the production of any recommendation in this report shall be the date and time of dissemination of this report as recorded in the report timestamp.
Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.
BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://go.bofa.com/coi.
"BofA Merrill Lynch" includes Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and its affiliates. Investors should contact their BofA Merrill Lynch representative or
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80 2016 Future of Financials Conference | 17 November 2016
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2016 Future of Financials Conference | 17 November 2016 81
Research Analysts
US Banks
Erika Najarian
Research Analyst
MLPF&S
+1 646 855 1584
erika.najarian@baml.com
Ebrahim H. Poonawala
Research Analyst
MLPF&S
+1 646 743 0490
ebrahim.poonawala@baml.com
Michael Liu
Research Analyst
MLPF&S
+1 646 855 3874
mliu3@baml.com
Brandon Berman
Research Analyst
MLPF&S
+1 646 855 3933
brandon.berman@baml.com
Andrew Schukman
Research Analyst
MLPF&S
+1 646 855 3622
andrew.schukman@baml.com
Christopher Nardone
Research Analyst
MLPF&S
+1 646 743 2016
christopher.nardone@baml.com
Brokers, Alternatives, Asset Managers, and Trust Banks
Michael Carrier, CFA
Research Analyst
MLPF&S
+1 646 855 5004
michael.carrier@baml.com
Sameer Murukutla, CFA
Research Analyst
MLPF&S
+1 646 855 2960
sameer.murukutla@baml.com
Jeffrey Ambrosi
Research Analyst
MLPF&S
+1 646 855 5034
jeffrey.ambrosi@baml.com
Michael Needham, CFA
Research Analyst
MLPF&S
+1 646 743 0179
michael.needham@baml.com
Shaun Calnan, CFA
Research Analyst
MLPF&S
+1 646 855 1362
shaun.calnan@baml.com
Specialty Financial Services
Kenneth Bruce
Research Analyst
MLPF&S
+1 415 676 3545
kenneth.bruce@baml.com
Mihir Bhatia
Research Analyst
MLPF&S
+1 415 676 3575
mihir.bhatia@baml.com
82 2016 Future of Financials Conference | 17 November 2016