EBOS keeps on snacking | US bank earnings

24 October 2023

NZ/Aus

EBOS > nice result from EBOS…revenue up 14% to $12.2bn and NPAT up 23.00% to $281mn. Continues to be our preferred “compounder” in NZ — can be had for 23x earnings…pet food business continues to be a source of growth (+24%) — we continue to like the pet thematic…Scales is another way to play this…

Big week for AGMs — EBOS today (we’ll be there, look for the analysts in party hats celebrating a job well done), Fletchers and Sky City later in the week. Expecting mgmt to get a grilling at Sky City (regulatory woes continue to weigh upon the stk price) and Fletchers to clarify their liability re: defective pipes sold in Aussie. Neutral on both.

Private Equity > fast-casual Mexican chain Guzman Y Gomez is reportedly looking at listing at 17-18x earnings, about half of the multiple that Barrenjoey paid for it 1 and a half years ago — the last sale of shares slapped a $1.35bn valuation on the whole thing; a public market valuation may we well below that. It’s the “gravity” of higher interest rates being applied to PE…

Closer to home, Sharesies is reportedly doing a secondary offer of shares at 20-25% below its previous valuation. Hard to think about a company publicly listing right now, though we note that their Kiwisaver and high interest account businesses just might be the thing they need to show some growth + profit.


US Bank Earnings

US Bank earnings have mostly held up well, thanks to higher interest rates and noted that economic conditions have surprisingly remained resilient so far, but are pointing a signs of concern going forward. Our preference remains JPMorgan (JPM) while we think Goldman Sachs looks interesting trading below book value, if you can “hold on” for the next cycle. Here’s the key takeaways:

  • Most banks reported higher net interest income.

This isn’t surprising as higher rates allow banks allow to charge high rates – however net margins are now expected to fall as lending slows and rates to be paid on deposits rise.

  • Consumer lenders did better than investments banks.

Morgan Stanley reported a decline in profits due to a slowdown in M&A activity, while Goldman Sachs took a hit on the sale of three business units. In general, fee income at most banks has grown very slowly over the last few quarters.

  • Consumers are still in reasonably good shape, but spending is slowing.

Consumer lenders noted most consumers are in good shape but borrowing and spending are slowing. Most banks expect a significant slowdown in consumer spending in the next quarter.

  • Bad Loans are rising.

Delinquencies and late payment are on the rise, at the highest level since the pandemic began – but are still at historical lows.

  • Mortgage lending was down a lot.

JP Morgan, Citigroup and Wells Fargo reported mortgage origination down 9% 17% and 70% respectively. The variance here is a reflection of the different customer bases – but is still not a surprise given sky high interest rates hitting 8% (a 20 year high).

Banks are also accounting for unrealised losses of $650 billion.

Bank valuation looks interesting, well below 10-year averages trading a 7.7 earnings multiple. Implying risks to the stock over the near term and earnings uncertainty. We take this as markets remain very war on the banking sector still.

Let’s see how big tech earnings hold up the next couple of weeks.


Macro + Forex

EUR/USD is the chart in focus today, as the cross climbed to the highest level in a month, consolidating gains as the US Dollar remains under pressure on the back of declining US Treasury Yields, with PMI as the data point due.EU accelerated it’s upside momentum, breaking above the 200SMA, and the H4 chart shows the break of 1.06440 (Sep-28 High), making way for new buying into range 1.07663-1.06798.  The two MAs illustrate strong support for the pairs, however, with RSI currently above 70, we could well see some short term consolidation before bulls look to take this into the range noted. Volatility is set to continue this week, as the Eurozone and US PMI data is scheduled, with the consensus for a marginal improvement in the Euro area and a slight decline in the US.  Moving into the week, the ECB will hold their policy meeting, alongside US GDP and the FED’s inflation gauge.

Other Macro > US 10 yrs briefly touched 5.00% before declining to 4.84% — we think it’s likely to go back to 5.00% — position accordingly…the US govt runs out of funding on 17 Nov and is still without a speaker…get “bearish”. Noting Bill Ackman closed out of his US 10 yr play after they hit 5.00% — we see room for it to hit again.


Misc.

Auto loan defaults are rising — see below from Bloomberg. Feels like a tinderbox — what happens when initial jobless claims spike?

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