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