taxes, less regulation, and more fiscal spending. A potential offset is that deficits
from government spending and tariffs could create inflation. Even so, management
was cautiously optimistic on growth.
• For Europe, Brexit was the big news and Mr. Gray expects the next couple of years
will be somewhat challenging for the U.K, though the bigger question is core
Europe, where rates and inflation are likely to be lower for longer. In Asia, China is
decelerating, particularly for manufacturing, infrastructure, and real estate which
will likely continue though don’t expect a hard landing in China. A trade war
between the U.S. and China could be a risk to the downside for China. In India, BX
sees accelerating economic growth and falling inflation and interest rates, along
with a lot of demand for office space in India.
• Mr. Gray does not believe we are in the early stages of the real estate cycle, but
concern over a bubble in commercial real estate in the U.S. is probably overdone for
a couple of reasons. 1) Supply and demand are reasonable, given modest growth in
supply and an economy that is growing. 2) Debt levels aren’t out of hand like in
‘06/’07. 3) Cap rates are low at around 5%, compared to ‘07 when 10yr treasuries
were at the same level. Overall, you aren’t going to see the same returns as in the
past, but looking at past periods where rates and growth increased, commercial real
estate did fine.
• In terms of growth, Mr. Gray is optimistic on the outlook. Half of the areas BX
invests in today didn’t exist at the time of the IPO, and that culture of innovation,
growth, and investing for attractive returns is alive and well.
42 2016 Future of Financials Conference | 17 November 2016
Carlyle Group (CG), C-2-8, Neutral
• Glenn Youngkin, President and Chief Operating Officer, presented for CG. Overall,
Mr. Youngkin is positive on the economic/market backdrop and on CG’s ability to
generate cash carry relatively consistently over time given the firm’s diversity of
funds.
• When asked “What would get you more interested in investing in CG stock?” most
investors would like to see an increased float and reduced complexity (40%),
followed closely by rising fee related earnings (30%). Investors are also interested
in seeing increased visibility on the distribution (15%) and increased contribution
from RA and GMS segments (15%).
Chart 62: What would get you more interested in investing in CG stock?
45%
40%
40%
35%
30%
30%
25%
20%
15%
15% 15%
10%
5%
0%
Rising fee related
earnings
Increased visibility on
the distribution
Increased contribution
from RA and GMS
segments
Increased float and
reduced complexity
Source: BofA Merrill Lynch Global Research
• If comprehensive tax reform includes an elimination of carried interest tax,
potentially moving to an ordinary income rate, it could have some impact to after
tax unitholder returns. However, Glenn thinks it is very early to speculate on any
changes and expects tax changes to likely be comprehensive.
• Glenn sees the potential for a strong push in infrastructure, along with tax change,
defense spending, and the border will get a lot of attention along with international
trade. Three main conclusions: 1) First time in a long time that there is a universal
pro-business outlook across congress and the presidential office; 2) Unclear today
what is going to be enacted, there is optimism but uncertainty; and 3) CG is not
going to make meaningful changes one way or another based on speculation. CG
launched its latest infrastructure fund in September, and the election results are
more wind in the sails.
• CG has multiple funds, each with its own economic engine. That makes the cash
flow profile more stable than other firms. Management believes that a discounted
valuation in the stock is driven more by fear of a recession vs. lower FRE. Glenn
thinks that outlook has changed with the election. The economy may be going into
extra innings now.
• The investment environment hasn’t changed materially in last few weeks - it
continues to be tough. Global growth will continue to be muted, and despite the
2016 Future of Financials Conference | 17 November 2016 43
move in the ten year treasury rate, interest rates remain low and the combination
of those things results in high prices.
KKR & Co (KKR), C-1-8, Buy
• Bill Janetschek, Chief Financial Officer, presented for KKR. Overall, Mr. Janetschek
believes that KKR’s balance sheet gives them the ability to take advantage of
market dislocations, sees opportunities to grow in certain areas (e.g. infrastructure
and real estate), and noted that they don’t need to grow the headcount to bring on
more assets.
• When asked “What would get you more interested in investing in KKR stock?” the
most common response was a market pullback for better deployment/returns
(50%). Respondents also felt that attractive returns and book value growth (33%),
and stronger fee related earnings (17%) were also important. Less important for
investors was improving energy markets and overall market confidence (0%).
Chart 63: What would get you more interested in investing in KKR stock?
60%
50%
50%
40%
33%
30%
20%
17%
10%
0%
Stronger fee related
earnings
Attractive returns and
book value growth
0%
Improving energy
markets and overall
market confidence
A market pullback for
better
deployment/returns
Source: BofA Merrill Lynch Global Research
• Overall, KKR likes the publicly traded partnership structure today. If comprehensive
tax reform includes an elimination of carried interest tax, the income would still get
passed through in that scenario which avoids a second level of taxation, so it still
may not be attractive to change the structure. But, if the corporate rate is also
lowered significantly, it could potentially make sense to go to a c-corp.
• Bill sees infrastructure as a real growth area for KKR. 7-8 years ago it was difficult
to raise an infrastructure fund as the asset class didn’t do very well in the financial
crisis; today there is more interest. KKR’s first infrastructure fund was around $1B
and the second one was around $3B. Infrastructure needs are tremendous longterm,
with $1-2 trillion capital needed for projects over the next decade, and
infrastructure spend is one area of consistency across the two major parties.
• Management thinks that investors understand the reason for the change in the
distribution policy. KKR likes to pay out the stable dividend and redeploy capital into
the balance sheet. As part of the year-end process, KKR will likely review the level
of the fixed distribution and determine whether it should be changed. KKR would
like to have around 40% of the balance sheet invested in private equity over time.
• KKR will manage concentration risk, and it is unlikely that the firm will make
another investment as big as First Data again. The biggest advantage to having a
44 2016 Future of Financials Conference | 17 November 2016
large balance sheet is the ability to take advantage of market dislocation, along
with high margins.
• The firm grew at a healthy rate from 2004-2014, and with around 1,200 people
now there doesn’t need to be much growth in headcount for the time being, the
infrastructure is in place. Marshall Wace AUM has grown significantly since they did
the deal, due in part to advantages from combining the two firms. Real estate is an
area where KKR is small and could see more growth.
Specialty Finance
American Express Company (AXP), B-2-7, Neutral
• Presenting from American Express Company was Mr. Jeff Campbell, Chief Financial
Officer. Overall we thought AXP presented a fairly upbeat outlook on billings, loan
and revenue growth. AXP did express caution on near-term Discount rate pressures
and FX headwinds.
• When asked what would be a key factor to increase / initiate a position in AXP, 53%
of the audience said they would like to see better visibility in AXP’s core growth.
AXP acknowledged the sale of the Costco portfolio to Citi has added complexity to
reporting results and has provided additional disclosures on underlying trends in the
quarterly results. AXP also said that accelerating revenue growth is a key area of
focus for management.
Chart 64: What would be a key factor for you to increase / initiate a position in American Express?
60%
53%
40%
29%
20%
7%
13%
0%
Accelerating global
growth
Renewed visibility in
growth in AXP’s core
business
Solid execution of cost
reduction initiatives
More aggressive
capital management
Source: BofA Merrill Lynch Global Research
• AXP was a little surprised that more investors did not view its focus on loan growth
as an appropriate strategy to increase wallet share amongst the revolving segment.
Instead a plurality of investors viewed AXP’s strategy as appropriate in light of the
portfolio sale but risky due to the duration of the credit cycle. While investors were
concerned about the duration of the credit cycle, AXP emphasized its low loss rates
and premium customer base as well as the loss of the Costco portfolio to argue
that AXP's credit profile will not materially change from its current strategy to grow
revolving balances through revolving credit card customers.
Chart 65: How would you describe American Express’ strategy to expand exposure to credit?
60%
40%
20%
0%
8% 8%
Timely opportunity to
grow earnings while
credit costs are low
Appropriate strategy to
increase wallet share
amongst revolving
segment
46%
Appropriate in light of
the Costco portfolio
sale but risky due to
duration of credit cycle
38%
Risky due to extended
duration of the credit
cycle
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 45
• On a more cautious note, AXP said that Discount rate pressures are likely to remain
elevated near-term as EU merchants renegotiate contracts post-interchange rules
and the OptBlue program gains additional scale in the US. Strengthening in the
US$ will also lead to FX headwinds that will likely impact NT results, particularly
from countries like Mexico where AXP has a large business.
Conference Panels Top Takeaways
Contact your BofA sales representative for additional information.
Blockchain: Potential Transformation of Financial Markets
With Blockchain one of the most talked about potential disruption in financial services
and 71% polled noting that blockchain is a significant opportunity for financial service
firms, we thought it was timely to host a panel on the potential impact of Blockchain on
financial markets that included Co-founder & COO of R3 Todd McDonald and CEO of
Axoni Greg Schvey.
• Blockchain could lead to $60-80bn of annual potential cost savings for
financial institutions. While it is still early days to know what the full impact of
potential cost savings that blockchain technology could bring to financial
institutions, the panelists believe that total savings could reach $60-80bn.
• Successful implementation of equity swaps. An area where Blockchain has shown
to be successfully implemented is around equity swaps. Axoni had worked with
multiple financial institutions to handle data reconciliation around its equity swaps
record which drove efficiencies.
• Trade finance viewed as most likely for success. When asked which part of the
financial industry will be the first to successfully utilize blockchain technology, 38%
of those polled cited trade finance/transaction banking as the most likely, with 28%
citing capital markets & securities servicing.
Chart 66: Which part of the financial industry do you believe will be the first to successfully utilize
blockchain technology?
40%
38%
30%
20%
14%
28%
21%
10%
0%
Wholesale payments
(cross-border F/X,
correspondent banking)
Trade
fianance/transaction
banking (receivables
finance, commodities
trade finance)
Capital markets &
securities servicing
(securities settlement,
asset documentation)
Retail payments
(parallel currency
systems, remittances)
Source: BofA Merrill Lynch Global Research
• Implementation could be earlier than expected. While many investors are
skeptical that blockchain will be broadly adopted in the near term, with none of the
audience expecting it to be widely adopted within 12-24 months, the panelists were
more optimistic and believes that there could be upside surprise in terms of the
timing as proof points and implementation could happen more quickly than
expected.
46 2016 Future of Financials Conference | 17 November 2016
Chart 67: How knowledgeable are you with blockchain technology?
60%
50%
50%
40%
34%
30%
20%
16%
10%
0%
Very knowledgeable Moderately knowledgeable Not at all knowledgeable
Source: BofA Merrill Lynch Global Research
Chart 68: After this panel, how do you feel about the applicability of
blockchain technology in financial services?
Chart 69: How long do you think it will take for financial sevices
industries to broadly adapt blockchain technology?
80%
70%
60%
50%
40%
30%
20%
10%
0%
71%
14% 14%
A significant A modest opportunity
opportunity for for financial service
financial service firms firms
Overhyped
technology
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
40%
36%
24%
0%
12-24 months 3-5 years 5+ years 10+ years
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
The Future of Clearing: Understanding the Options
• Guest speakers in this panel included Brian Ruane (CEO, Broker Dealer Services,
BNY Mellon), Lee Betsill (Chief Risk Officer, CME Group), Michael C. Bodson
(President & CEO, DTCC), John Horkan (Head of North America and Global COO,
Rates & FX, LCH, LSE Group) and Marcus Denne (Director, Global Clearing, BofA
Merrill Lynch).
• With the start of the Uncleared Margin Rule (UMR) on September 1st, we asked
investors what was the primary challenge related to the new clearing rules. Most
investors (95%) thought the rising cost, particularly in the amount of collateral
required (50%) and the complexity around infrastructure and different country rules
(45%) were the main issues.
2016 Future of Financials Conference | 17 November 2016 47
Chart 70: What is the primary challenge related to the new clearing rules?
60%
50%
40%
50%
45%
30%
20%
10%
0%
The rising cost,
particularly in the
amount of collateral
required
The complexity around
infrastructure and
different country rules
2% 2%
The lack of dealers
offering the capabilities
given their challenges
None
Source: BofA Merrill Lynch Global Research
• Panel participants believe that the election/shift in regulatory outlook might lead to
a slowdown of products being added to the clearing mandate, with FX being the
biggest unknown.
• Going forward, firms are tackling U.S. vs Europe collateral harmonization/transfer
(DTCC and Euroclear are working on a collateral transfer initiative that is expected
to launch in 1Q17), collateral management through firms including BNY Mellon, and
Cleared repo could also be on the horizon (CME has filed an application with the
SEC but no timeline given).
• We asked investors what the biggest potential risks are in the clearing mandate and
CCPs, and 33% of voting investors thought collateral concentration issues with
cybersecurity (27%) coming in 2nd.
Chart 71: What is the biggest potential risk in the clearing mandate and CCPs?
35%
33%
30%
25%
27%
20%
15%
17%
17%
10%
7%
5%
0%
Much more
collateral will be
needed in stress
times
There will be
collateral
concentration
issues
CCP risk models
fail
Dealer/FCMs fail
Cybersecurity
Source: BofA Merrill Lynch Global Research
48 2016 Future of Financials Conference | 17 November 2016
Equity Market Structure: Simplifying the Complex
• Guest speakers in this panel included Anthony Barchetto (EVP, Head of Corporate
Development, BATS Global Markets, Inc.), Jamil Nazarali (Head of Execution
Services, Citadel Securities Inc.), Eric Stockland (Chief Strategy Officer, IEX Corp.)
and Pankil Patel (Managing Director, Electronic Sales, BofA Merrill Lynch).
• Panel members had a spirited debate regarding the current market structure pros
and cons, rebates, off-exchange trading, latency, market maker obligations, and the
future of regulation post the election.
• We asked investors what they thought of the current state of the equity market
structure, and 74% thought that the market needs revamping. 32% believe that
there was a problem with the depth of liquidity and 23% thought there were
misaligned incentives.
Chart 72: What is your view of the current state of the equity market structure?
35%
30%
25%
27%
32%
23%
20%
15%
14%
10%
5%
0%
The market
structure is overall
adequate
5%
The market
structure needs
improvement –
notably in
transparency
The market
structure needs
improvement –
notably in liquidity
of size
The market
structure needs
improvement –
notably in
misaligned
incentives
The market
structure needs a
full revamp
Source: BofA Merrill Lynch Global Research
• Given the announcement that SEC Chairwoman White will leave at the end of
President Obama’s term, this will likely lead to some regulatory uncertainty and lack
of activity given not enough commissioners to make forward progress. In addition,
the new Chair will likely be focused on less regulation and one panel member
thought Reg NMS could come under review.
Life after DOL: Evolving Beyond the Fiduciary Rule
• We hosted industry experts for a panel on the Department of Labor’s (DOL)
fiduciary rule, which is set to go into effect in April 2017. Panel participants
included Michael Hadley (Partner at Davis & Harman LLP), Lisa Bleier (Associate
General Counsel at SIFMA), and Kevin Crain (Head of Workplace Financial Solutions
at Bank of America Merrill Lynch).
• Given potential changes for the brokerage industry, we asked investors “Will the
DOL’s fiduciary rule cause meaningful changes to the brokerage industry?”. Most
investors believe that the rule will cause a number of significant changes to the
brokerage industry (83%), including significant pressure on commission revenues, a
shift to advisory and fee based accounts, and assets in motion with some to robo
advisor and RIA platforms.
2016 Future of Financials Conference | 17 November 2016 49
Chart 73: Will the DOL’s fiduciary rule cause meaningful changes to the brokerage industry?
90%
83%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3%
Yes, significant
pressure on
commission
revenues
7%
Yes, a shift to
advisory and fee
based accounts
0%
Yes, assets in
motion with some
to robo advisor
and RIA platforms
All of the above
7%
No significant
impact
Source: BofA Merrill Lynch Global Research
• We also asked about changes to the asset management industry, positing “Will the
DOL’s fiduciary rule cause meaningful changes to the asset management industry?”
Investors again expect multiple changes (91%), including an accelerated shift from
active to passive, further pricing pressure, and higher cost of distribution and
margin pressure. No respondents expect there to be no significant impact to the
asset management industry.
Chart 74: Will the DOL’s fiduciary rule cause meaningful changes to the asset management industry?
100%
90%
91%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
Yes, an
accelerated shift
from active to
passive
4% 4%
Yes, further Yes, higher cost of
pricing pressure distribution and
margin pressure
All of the above
0%
No significant
impact
Source: BofA Merrill Lynch Global Research
• The panel noted that President Elect Trump did not address the Fiduciary Rule
during his campaign, so his view on the rule is unknown, but Republicans have
largely been against it. There is some precedence on what we could expect
President Elect Trump to do with the fiduciary rule. President Bush had
implemented an investment advice regulation that President Obama delayed
several times until it was finally withdrawn. The view from the panel was that the
most likely action over the next several months is that President Elect Trump delays
the rule, though to repeal or change it would take work and new regulatory
50 2016 Future of Financials Conference | 17 November 2016
proposals. Mr. Trump and congress could also ultimately defer to the SEC to act on
a Fiduciary Rule.
• The biggest issue from the brokerage industry is the contract requirement under
the BIC. The issue with the contract is increased liability, given the contract makes
it easier to litigate. This would likely be the primary area for modifications. Even
though many firms have made announcements regarding changes they expect to
make, most have not figured out all of the underlying steps yet given that it is so
complicated and impacts large parts of the business.
• The industry will have to move forward on implementing the rule, given the April
2017 implementation date, but firms may not put as much effort into certain areas
that need to be final by January 2018. In addition, prior to Mr. Trump starting, the
transition team could make an announcement about the rule. However, even at that
stage firms would have to determine whether or not to act on the announcement.
• While the most likely scenario is a delay in the rule, with the potential for some
modifications to ease some of the burdens, most see the trend towards a fiduciary
rule already well in motion for the industry.
The Future of Tech-Based Lending
• James Paris, Executive Vice President at Avant, Ashish Jain, Senior Vice President at
SoFi and John Schleck, Senior Vice President at Bank of America discussed key
trends and recent developments in Tech-Based lending.
• Audience members and panelists generally agreed that improved customer service,
full spectrum lending, and better pricing all are contributing to the growth in techbased
lending. SoFi did caution that better pricing is not usually the primary driver
as banks can usually offer cheaper pricing.
Chart 75: What is the biggest driver of growth in tech-based lending
40%
30%
27%
27%
33%
20%
10%
13%
0%
Improved service
model
Full spectrum lending Better pricing –
cheaper
All the above
Source: BofA Merrill Lynch Global Research
• Acquisition models differ by company but being efficient at customer acquisition is
key for a successful tech-based lender. SoFi estimated that its customer acquisition
cost is 1/5 th that of a bank which enables it to effectively compete and partner with
banks. Panelists highlighted the use of data analytics to more efficiently target
potential customers via direct mail, digital ads or through affiliate programs.
• Audience members were split on the main risks to investing in tech-based
companies with limited sustainable competitive advantage, untested credit models
and fragile all highlighted as key risks. Somewhat surprising given events earlier
this year, regulatory concerns were not high on the list of investor concerns.
2016 Future of Financials Conference | 17 November 2016 51
Chart 76: Biggest risks to investing in a tech-based lending companies
40%
30%
29%
32% 32%
20%
10%
7%
0%
No sustainable
competitive advantage
Untested credit
model/risk
management
Fragile funding model
Uncertain regulatory
backdrop
Source: BofA Merrill Lynch Global Research
• Panelists agreed that flexible funding models that utilized both balance sheet
lending and distribution of loans were important for a tech based lender.
Additionally, panelists said that risk management is top of mind and tech based
lenders are increasingly applying refined analytics that rely on credit variables
directly from credit bureaus into their lending and portfolio management decisions
The Future of Payments: The Need for Speed
• Jonathan Lear, President – North America, Earthport and Bruce Parker, Founder of
Modopayments spoke on The Future of Payments panel. In a wide ranging
discussion, the panelists discussed the B2B opportunity, the importance of
partnering with incumbents and the need to maintain Safety standards.
• Audience members identified the lack of a clear value proposition for new players
relative to incumbents and concerns about Safety and Security as the largest risks
to investing in new Fin Tech payments companies.
Chart 77: What is the primary risk to investing in new entrants within the payments landscape?
40%
20%
0%
38%
Unclear value
proposition of new
entrants relative to
incumbents
Source: BofA Merrill Lynch Global Research
23%
Rapid innovation that
erodes value
proposition
38%
Concerns around
safety & security
0%
Intense regulatory
friction
• Panelists generally thought the best way for a new Fin Tech companies to succeed
was by partnering with incumbents. This was consistent with the views of audience
members, a majority of whom thought the payments industry would continue to be
controlled by incumbent institutions partnering with innovative tech companies.
52 2016 Future of Financials Conference | 17 November 2016
Chart 78: What do you believe will be the structure of the payments industry in 5-7 years?
80%
60%
59%
40%
28%
20%
0%
Dominated by large
incumbent payment
brands
Controlled by large
incumbent institutions
enable by innovative
tech companies
10%
Controlled by savvy
tech companies
operating through
traditional payments
providers
3%
Dominated by dynamic
eco-system of savvy
tech companies
Source: BofA Merrill Lynch Global Research
• Panelists highlighted that while recent innovations in faster payment transfers have
been focused on P2P applications, the B2B opportunity is 7-10x larger. That said,
panelists thought, based on experience in the UK, the cost of faster payments
would likely have to be borne by the existing payment infrastructure as consumers
have not been willing to pay for faster transfers. Additionally, panelists pointed out
that in countries where faster payments have been implemented, it has mostly been
a mandate by regulations suggesting the government has an important role to play.
• Panelists highlighted Security and Compliance as being essential for a new Fin Tech
company to be admitted as part of the industry ecosystem. Incumbent payment
companies will only partner with a new FinTech company that can meet the safety
and regulatory standards that the incumbent is required to meet.
Robo Advisors: Shedding Light on the Potential Opportunity
• Guest speakers in this panel included Eli Broverman (Co-Founder and President of
Betterment), Randy Sternke (Vice President, Business Development at Alkanza), and
Vaughn Bowman (Director, Managed Solutions Channel Management at BofAML).
Each firm discussed the unique aspects of their individual business models and
where they see the robo industry headed in the future.
• Broverman brought up several key points on how the independent robo advisor
model came about and why it will continue to grow in the future. He believes that
the main drivers include a lack of quality advice for investors with few assets,
investors’ beliefs that financial institutions are not aligned with their interests or
transparent, and the fact that people want financial services to work as well as the
other technology in their lives. Broverman believes that the biggest opportunity
going forward is in the mass affluent segment and the 401K space.
• Alkanza is focused on providing robo capabilities to financial advisory firms through
partnerships, rather than directly to consumers, with a focus on the platform as well
as portfolio construction.
• We surveyed the audience to gauge their views on the potential size of the robo
advisor market and the most common answer was that assets will surpass $1T,
followed by assets will hit $500B and then level out.
2016 Future of Financials Conference | 17 November 2016 53
Chart 79: How significant do you think robo advisor platforms will become over the next 3-5 years?
60%
50%
51%
40%
35%
30%
20%
14%
10%
0%
Assets will surpass $1T
Assets will hit $500B then level
out
Assets will hit $500B then
decline
Source: BofA Merrill Lynch Global Research
• Based on our polling questions, investors believe that the main beneficiaries of the
robo advisor trend will be the passive asset managers (40%), followed by the large
broker firms adding robo technology (28%) and the online brokers that have
scalable robo platforms (21%). They also believe that the main driver of success for
robo advisors will be a low and transparent cost structure (44%), followed by an
efficient technology and user interface (25%).
Chart 80: Which firms will benefit the most from the robo advisor trend?
45%
40%
40%
35%
30%
28%
25%
20%
21%
15%
10%
5%
0%
Passive asset
managers
Large broker firms
adopting robo
technology
Online broker robo
platforms that
have scale
9%
Independent B2C
robo advisor firms
2%
Robo advisor firms
that have a B2B
model
Source: BofA Merrill Lynch Global Research
54 2016 Future of Financials Conference | 17 November 2016
Chart 81: What do you expect to be the main driver of success for robo advisors?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
44%
A low and
transparent cost
structure
25%
11% 11%
An efficient Advanced portfolio
technology and construction that
interface platform outperforms
Department of
Labor fiduciary
rule
8%
Access to a
human in volatile
markets
Source: BofA Merrill Lynch Global Research
• Finally, all of the panel participants believe that the DOL Fiduciary Rule will not be
repealed by the new administration, although it may be delayed. In the end, this
should benefit robo advisors, as most of the models have low fee structures and
limited conflicts of interest.
State of the Multifamily Market: Cooling or Collapsing?
We hosted a panel to discuss the state and the outlook for the multifamily market
following a year which has witnessed increased investor anxiety around multifamily loan
growth and heightened scrutiny by banking regulators of multifamily loan portfolios,
particularly at banks with a high concentration of multifamily loans. Our panelists
included John Jardine, Co-CEO of Ares Commercial Real Estate Corp, David
Brickman, Executive Vice President and the Head of Multifamily business at
Freddie Mac and Alan Fishman, Chairman of the Board at commercial real estate
investment trust Ladder Capital.
• Multifamily on solid footing: The panelists view the multifamily market as having
a solid foundation with most of the risk lying at the high end, class A properties in
particular markets (New York, San Francisco). Even here, the panelists agreed that
the issues at the high end segment were more likely to manifest themselves in the
form of decelerating growth in rents (and increased incentives by landlords) as
opposed to serious credit issues. Investors echoed this sentiment during a live
audience poll with 60% of the investors seeing issues in the multifamily market
limited to certain regions and at certain rental price points.
2016 Future of Financials Conference | 17 November 2016 55
Chart 82: How do you view fundamentals for multifamily lending in 2017?
70%
60%
50%
40%
30%
20%
10%
0%
10%
Softening
fundamentals
should lead to
slower financing
activity next year
0%
Softening
fundamentals
should lead to
worsening credit
metrics
23%
Softening
fundamentals
should lead to
slower financing
activing and
worsening credit
metrics
60%
Some concern, but
only in certain
regions and at
certain rental price
points
7%
No concern
Source: BofA Merrill Lynch Global Research
• Future demand in multifamily promising: Looking forward, the panelists see
healthy demand for multifamily housing given a preference among millennials to
live in urban areas versus the suburbs. Moreover, the panelists noted that increasing
debt burden tied to student loans is likely to make home ownership out of reach for
several first time home buyers. Furthermore, it was noted that the US needs 1.5mn
new housing units each year and the present level of construction activity was not
keeping pace with this when looking at it on a national level.
• Foreign capital part of the equation: Some of the panelists are seeing a
significant flow of foreign capital into the multifamily market with Mr. Brickman
surmising that data around inflow of foreign capital into the commercial real estate
market was likely understated given that significant amount of inflows have come
indirectly through investment vehicles like private equity.
• Risk retention rules modest impact: Our multifamily panelists viewed the risk
retention rule for CMBS as having a modest impact given the large role played by
the GSEs in lending to the multifamily space. It was also noted that while the rule
may dampen private securitization activity, less competition from the CMBS
markets would be a positive for balance sheet lenders.
• Impact from rising rates may not be all news: While the panel acknowledged that
the rise in interest rates will likely push cap rates higher, an increase driven by a
more favorable growth outlook may not be as bad. This is because a stronger
economy should theoretically lead to a better backdrop for jobs and wage growth,
thereby providing landlords some leeway to raise rents.
The Future of Big Data in Financials
We hosted a panel to discuss how big data is impacting the financial services industry.
The panel discussed key big data buzzwords including machine learning, data scientist,
structured data and unstructured data. They panel also reviewed how different firms are
adapting big data solutions to solve specific company issues. Our panelists included
Jessica Donohue, the Chief Innovation Officer for State Street and the head of
advisory and information solutions for State Street Global Exchange, Greg
Michaelson, head of data science practice at Data Robot, and Sandeep Saini, head
56 2016 Future of Financials Conference | 17 November 2016
of global markets sales, research, and capital markets technology at Bank of
America Merrill Lynch.
• How big data can influence the future: The panel confirmed the notion that there
are many different definitions for big data, but everyone seemed to agree almost all
financial firms are seeking effective ways to implement big data techniques to 1)
generate alpha, 2) manage risk 3) manage expenses.
• Companies polled are a long way from benefitting big data: 96% of the
audience polled said their firm is either somewhat effective or not at all effective at
using big data. Some of the main challenges the panelists highlighted during our
discussion were merging multiple legacy data systems and finding attractive talent
with both data science and business experience.
Chart 83: How effective is your firm at using big data?
70%
60%
57%
50%
40%
39%
30%
20%
10%
4%
0%
Fully integrated with the
investment and process and
operations
Somewhat effective
Not at all effective
Source: BofA Merrill Lynch Global Research
• The panel discussed three roles needed to solve data science problems: 1)
someone who has sway to make change and implement solutions 2) business
champion, someone to discuss solutions with technical employees and to share
knowledge on key issues such as regulation 3) technically savvy employees.
• Implementation advice: The panel provided advice for firms that have yet to utilize
big data to attempt to solve problems facing their companies. The advice included
seeking problems that could be solved using data science and focusing on small
wins with the data present.
2016 Future of Financials Conference | 17 November 2016 57
Chart 84: Now that we’ve defined “big data”, how far do you think financial institutions are at
embracing the use of big data today?
60%
50%
40%
30%
20%
10%
0%
5%
Fully committed to
using big data to
generate
investment alpha /
revenue growth
19% 19%
Fully committed to
using big data to
improve cost or
process efficiency,
risk management,
regulatory
compliance
Fully committed to
using big data
across the
organization
49%
Somewhat
committed
8%
Not at all
committed
Source: BofA Merrill Lynch Global Research
Chart 85: After this conversation, have you changed your mind on how financial institutions are
adopting big data in their businesses?
60%
55%
50%
40%
30%
20%
23% 23%
10%
0%
Financial institutions are more
committed to allocating
resources to big data than I
thought
Financial institutions are less
committed to allocating
resources to big data than I
thought
No change
Source: BofA Merrill Lynch Global Research
The Future of Financials M&A and Regulation
We hosted a panel to discuss the state and outlook of M&A and regulation. Given the
results of the US election and the potential for easing of regulations, the panel
discussed a timely topic on the mind of investors. Our panelists included Rodgin Cohen,
Senior Chairman of Sullivan & Cromwell; Richard Kim, partner at Wachtell, Lipton,
Rosen & Katz, and Ed Hill, Senior Vice President, Government Affairs, Bank of
America Corporation.
• Regulation is about tone: Our panelists agreed that the scope and strength of
regulation comes from the tone and attitude of regulators rather than from
legislation. They noted that an attempt to repeal legislation such as Dodd-Frank
would be misplaced as most direction derives from the tops of regulatory bodies.
They also felt Senator Hensarling’s Financial Choice Act would not be a better
alternative to Dodd-Frank given the 10% leverage ratio is not a Federal Reserve
definition of leverage. Utilizing a Fed definition would likely lead to leverage north
of 10%. The inclusion of CAMEL ratings with the leverage ratio would also allow
regulatory sway over institutions.
58 2016 Future of Financials Conference | 17 November 2016
Chart 86: Following last week’s GOP sweep, do you think regulatory relief is in the cards for
the financial services industry?
70%
60%
50%
40%
30%
20%
10%
0%
29%
Yes, and this should have a
meaningful impact to returns
62%
Yes, but change in regulatory
burden and subsequent impact
to bank returns will be more
gradual than what financial
stocks are currently pricing in
9%
No, I think there will be little
change in regulatory burden
Source: BofA Merrill Lynch Global Research
• CCAR a product of regulatory attitude: The panelists agreed that CCAR in its
current form is not a result of legislation as post-recession bank stress tests (SCAP)
existed prior to Dodd-Frank. Furthermore, the panelists noted Dodd-Frank’s
definition of a stress test is very basic, which has been made more stringent and
complex as a result of regulators. Mr Cohen also noted that a lack of transparency
of the test was the least defensible part of CCAR.
• Biggest obstacle for bank M&A and activist influence is regulation. Despite
headlines of increased shareholder activism within the banking industry, the
majority of investors polled (61%) believe activist investors have only a moderate
impact on corporate strategy (see chart). Specifically, Mr. Cohen explained that two
of the three reasons why an activist will typically get involved with a corporate are
difficult to achieve on a bank’s board given the level of regulatory oversight on the
industry. While selling the bank is the one area where activists have had success,
this typically occurs at the community bank level. That said, he believes a change in
attitude of regulators could free up M&A activity.
Chart 87: What kind of impact does an activist investor have in corporate strategy and
ultimate shareholder value?
70%
60%
50%
40%
30%
20%
10%
0%
18%
Meaningful impact, as activism
behooves complacent Boards
to rethink corporate strategy in
a way that is most positive to
near-term and long-term
shareholder value
61%
21%
Moderate impact, as activism No meaningful impact, as many
can bring issues to the forefront activists have a short-sighted
and can invigorate deal view of shareholder value
discussions but have modest
influence in corporate strategy
and ultimate shareholder value
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 59
• How to do M&A right: When describing acquisitions that most impressed the
panelists, a key reason for success was the acquirer keeping the target
management in place as well as giving the target management independence. The
scope and planning of the integration was also critical for success.
Chart 88: Do you think M&A activity in financial services will pick
up in 2017?
Chart 89: If you voted yes, what statement closely matches your
rationale?
70%
60%
50%
40%
30%
20%
10%
0%
26%
57%
17%
Yes, meaningfully Yes, modestly No, I don’t think deal
activity will increase
60%
50%
40%
30%
20%
10%
0%
48% 47%
Lower anticipated
regulatory burden,
particularly on buyers
Modest economic
tailwinds and/or subscale
businesses will
behoove more
institutions to sell
5%
Shareholder activism
should pick up and
help drive activity
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
Understanding the Changing Fixed Income Markets
We hosted a panel to discuss the evolution of the fixed income market structure given
the advent of electronic trading and regulatory construct. Our panelists included Lee
Olesky (co-founder and CEO of Tradeweb), Adam Brown (Head of US Rates
Electronic Trading at BofAML) and Brian Callahan (Head of US Par Loan Trading
and the head of Electronic Initiatives for Global Credit and Special Situations at
BofAML).
• Electronification of fixed income markets steadily growing; however, lag
European market. Electronic trading came to fixed income trading in the late
1990’s as a way of automating transactions (i.e. create a more efficient process
between parties). Today in the US, the investment grade market is 16-20%
electronic, the high yield market is 8% (has doubled over the last few of years), the
treasury market (which has been growing steadily over last 10-15yrs) is 80-90% of
the actual trade count is electronic. While the electronification of the derivative
market was slower to evolve, recent regulatory reform has accelerated the
electronification process (50% today). That said, while the evolution towards
electronification in the US continues to grow, the European bond market is actually
more advanced with nearly 50% of the bond market automated (vs. 20% for the
US).
• Regardless of possible regulatory relief, electronification may slow but won’t
end entirely. While a partial repeal or lightening of Dodd-Frank would be a net
positive for the financial markets, and possibly lower the costs to banks and endusers,
Mr. Brown doesn’t see a dramatic effect on the market structure. In other
words, regulatory relief may only slow down the electronification progress.
• Electronification within the fixed income market is a modest priority among
asset managers. Fifty-two percent (52%) of the audience polled believe it to be a
modest priority in their own corporate strategy to embrace new
technologies/electronification in fixed income. Mr. Brown was not surprised by the
results as many of the asset managers have their own constraints from technology
funding to regulatory issues to running the day-to-day business. While
60 2016 Future of Financials Conference | 17 November 2016
electronification is something that pays dividends, these benefits occur over time.
That said, general sentiment from asset managers is that electronification is
something they want as it leads to efficiency.
Chart 90: As you think about corporate strategy for asset managers, how open is your firm with
embracing new technologies/electronification in the fixed income space?
60%
50%
52%
40%
30%
20%
19%
29%
10%
0%
Top priority in corporate
strategy
Modest priority in corporate
strategy
Low priority in corporate
strategy
Source: BofA Merrill Lynch Global Research
• ETF market for fixed income securities expected to grow significantly. Unlike in
the equities market where ETFs are 7% of the volume traded, fixed income ETFs
are still sub-1% (0.8% at YE15). As the market continues to grow, particularly in the
asset classes where the underlying bonds aren’t that liquid, Mr. Callahan noted
seeing increased liquidity in the ETFs for liquidity reasons. Following in the
footsteps of the equities market, Mr. Callahan expects the fixed income ETF market
to grow significantly and be very impactful to the overall market structure.
• Greater concern around speed at which liquidity can change vs. liquidity in the
market. There is a lot of concern around liquidity in fixed income markets. That
said, Mr. Brown is more concerned with the speed at which liquidity can change.
There has been growing evidence that the market is going to adjust greater and
faster than the underlying fundamental reasons for the correction. As such, this is
causing participants to revisit how they look at risk management. Now market
participants need to take into account not only their behavior, but their reaction to
other participants’ behavior (i.e. contagion effect).
• Fewer, well-established platforms reduce overall risk within system. Eighty-nine
(89%) percent of the audience polled prefer to conduct business with a few, wellestablished
platforms to diminish risk within the system. Using the government
bond market as an example, Mr. Olesky points out that the growing contribution
from PTFs to the overall treasury trade volume has increased the risk outside the
primary-dealer system. This is a risk Mr. Olesky believes needs to be addressed and
prefers a central clearinghouse for fixed income transactions.
2016 Future of Financials Conference | 17 November 2016 61
Chart 91: As you think about platform management, what is your view on having multiple options of
liquidity providers?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
11%
Prefer to have a material amount of options
89%
Prefer to conduct business with a few, wellestablished
platforms
Source: BofA Merrill Lynch Global Research
62 2016 Future of Financials Conference | 17 November 2016
Table 1: PO Changes
Firm Rating QRQ Current Price Old PO New PO
ASB UNDERPERFORM B-3-7 $22.45 $19.00 $20.00
BANC NEUTRAL C-2-7 $14.80 $18.50 $15.50
BBT BUY B-1-7 $42.82 $41.00 $45.00
BKU BUY C-1-7 $34.19 $36.00 $37.00
BOH UNDERPERFORM B-3-7 $85.67 $64.00 $75.00
C BUY B-1-7 54.63 $55.00 $60.00
CBF BUY C-1-7 $35.80 $35.00 $38.00
CBSH NEUTRAL A-2-7 $56.39 $53.00 $60.00
CFG BUY B-1-7 $30.73 $28.00 $33.00
CFR UNDERPERFORM B-3-7 $82.93 $70.00 $74.00
CMA UNDERPERFORM B-3-7 $59.21 $49.00 $55.00
EWBC BUY B-1-7 $45.64 $45.00 $50.00
FBP NEUTRAL C-2-9 $6.29 $6.00 $6.50
FCB BUY C-1-9 $39.75 $44.00 $44.00
FHB NEUTRAL C-2-7 $29.48 $28.00 $31.00
FHN UNDERPERFORM B-3-7 $17.97 $14.50 $16.00
FITB NEUTRAL B-2-7 $24.90 $23.00 $26.00
FSB NEUTRAL C-2-9 $33.80 $40.00 $36.00
GS BUY B-1-7 $206.26 $195.00 $230.00
GWB BUY B-1-7 $38.85 $38.00 $42.00
HBAN BUY C-1-7 $11.93 $12.00 $13.00
HBHC NEUTRAL B-2-7 $39.05 $35.00 $41.00
IBKC BUY B-1-7 $78.05 $74.00 $85.00
JPM BUY B-1-7 77.40 $74.00 $83.00
KEY BUY B-1-7 $16.73 $17.00 $18.00
MS BUY B-1-7 $39.19 $36.00 $43.00
NYCB BUY C-1-8 $15.36 $17.00 $17.00
PB UNDERPERFORM B-3-7 $64.38 $50.00 $58.00
PNC BUY B-1-7 $107.51 $100.00 $110.00
RF NEUTRAL B-2-7 $12.89 $11.00 $13.00
SBNY BUY B-1-9 $147.02 $140.00 $160.00
SIVB BUY B-1-9 $147.35 $140.00 $165.00
SNV NEUTRAL C-2-7 $38.01 $35.00 $40.00
STI BUY B-1-7 $50.79 $48.00 $53.00
TCB UNDERPERFORM B-3-7 $16.23 $13.50 $14.00
TCBI NEUTRAL C-2-9 $70.75 $62.00 $74.00
UMBF BUY B-1-7 $72.04 $65.00 $78.00
USB NEUTRAL B-2-7 $47.87 $45.00 $50.00
WFC BUY B-1-7 51.68 $50.00 $55.00
ZION UNDERPERFORM C-3-7 $37.46 $30.00 $36.00
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 63
Price objective basis & risk
AllianceBernstein (AB)
Our $25 price objective is based on 13x target P/E on our '17E, a discount vs our target
for asset managers as a group, based on improving but inconsistent flows and limited
active equity exposure as well as the MLP structure which means less liquidity, though a
high distribution. Upside/downside risks to our price objective are market
appreciation/depreciation, similar to other asset managers, underperformance, and an
unpredictable yield since it is based on earnings rather than fixed. Because Alliance is an
MLP, total potential return includes a variable distribution based on earnings.
Amer Express (AXP)
Our $74 price objective reflects a 13x PE multiple to our 2017 EPS estimate. Given the
elevated uncertainty, we expect AXP will trade near the low end of its historical
valuation range, which averages 12x-16x. This multiple reflects our view of solid loan
growth and better billings, offset by increased risks of rising credit and marketing costs.
We think the market will view AXP through a more credit card lens in the near-term,
which also supports a multiple at the low end of the historical range.
Upside risks to our PO are stronger than expected macroeconomic conditions,
accelerating consumer and business spending, lack of disruptions in capital markets, or a
decreasing regulatory burden. Downside potential could come from weaker than
expected macroeconomic conditions and renewed recessionary pressure, softer
consumer and business spending, disruptions in capital markets, or an increasing
regulatory burden.
Ares Management (ARES)
Our price objective (PO) for Ares is $18, which implies a target price-to-ENI (P/ENI or
P/E) multiple of 11x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts
(SOTP) analysis. Our SOTP analysis includes the following components: a
target multiple on fee related earnings (15x - in line with or a premium to asset
manager multiples given healthy growth and sticky assets), book value for the balance
sheet investments and accrued carry, and a discounted value on the performance fee
upside over a cycle (1.3x MOIC). Based on this method, we value the fee related
earnings at $13/unit, the balance sheet (principal investments and accrued carry) at
$4/unit, and the discounted value of future carry income and investment income at
$1/unit, which equates to a total value of $18.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, legal and political risk, increased
regulation, credit market disruptions, poor performance, weak fundraising, expansion
risk, key person and talent risk, competition, a unique corporate structure that limits
unitholder control, and lock ups.
Associated Banc-Corp (ASB)
We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $20 price objective and assign a 1.4x multiple to 3Q17E TBV and a 14.9x 2017
P/E multiple, in-line with smid-cap peers due to their near median return profile. Our
DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. The
upside risk to our price objective is a less onerous residential RE cycle. Downside risks
are a double dip in housing prices, deteriorating energy portfolio and falling rental
income for commercial properties.
Banc of California (BANC)
To arrive at our $15.50 price objective, we have employed a three-factor valuation
methodology that incorporates target P/E, target P/TBV and a DCF model. For our P/E
analysis, we use a 14x earnings multiple on BANC's 2017E core earnings below peer
64 2016 Future of Financials Conference | 17 November 2016
multiples due to lagging EPS growth. For our P/TBV valuation, we apply a 1.2x tangible
book multiple to BANCs 2Q17E tangible book below peer multiples due to lagging ROTE.
For our DCF analysis, we forecast net income growth stabilizes at 3% in the terminal
stage. We also assume a beta of 1.1x in the terminal stage.
Downside risks to our price objective are slower than expected loan growth, and a
reduction in the common dividend.
Bank of Hawaii Corp. (BOH)
We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $75 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to
peers, which we believe is appropriate given a stronger profitability and capital profile.
Our 17x multiple on 2017E EPS is equal to the the peer median given average EPS
growth relative to peers. Our DCF assumes a two-stage cost of capital of 9.8% and a
terminal growth rate of 3%.
Downside risks to our price objective are a longer-than-anticipated low rate
environment and a reversal of local economic improvement. Upside risks are a strongerthan-expected
economic rebound, better-than-expected capital distribution and a
shorter-than-anticipated low rate environment.
BankUnited, Inc. (BKU)
To arrive at our $37 price objective, we have employed an equal-weighted three factor
valuation methodology that incorporates target P/TBV, P/E and DCF. We have applied a
target P/TBV value multiple of 1.5x on our 2Q17E TBV and a P/E target multiple of 16x
'17 EPS, based on BKU's above average growth relative to peers. Our DCF assumes a
two-stage cost of capital of 7.9% and 9.3% and a terminal growth rate of 6%.
Downside risks to our price objective are slower CRE loan growth on the back of
regulatory oversight, as well as an inability to deploy excess capital, increased
competition for Florida M&A and an inability to continue to implement an organic
growth strategy in New York City.
BB&T Corporation (BBT)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $45 PO
and assign a 1.6x multiple to 2017E TBV and 14.5x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our EPS multiple is in-line with BBT's historical avg, which reflects very high-growth
years in the 1990s, a pace unlikely to be achieved near term given BBT's size as well as
the challenging macro backdrop and industry headwinds. Our DCF assumes a two-stage
cost of capital of 9.7% and 10.9% and a terminal growth rate of 4%.
Risks to our price objective are macro risks such as a double dip recession, the
implementation of a strict liquidity coverage ratio and further regulation on overdraft
income that restricts bank profitability. Specific to BBT, risks are enhanced regulatory
scrutiny and capital standards as a Domestic SIFI, the announcement of a large,
expensive deal, and the risk that the NPBC transaction does not consummate.
Capital Bank Financial Corp. (CBF)
Our $38 PO is based on an equal-weighted, two-factor valuation methodology that
assumes: We assumes a 20.0x P/ 2017e EPS and a target P/TBV of 1.6x to 2017E
tangible book given our forecast above peer EPS growth.
Downside risks to our PO are an inability to deploy excess capital and create value
through acquisitions.
2016 Future of Financials Conference | 17 November 2016 65
Citigroup Inc. (C)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO,
assigning a 0.9x multiple to 2017E TBV and 11x multiple on '17E blended NA and EM
earnings. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF
analysis by 20%.
Near term, we view C's current market multiple as overly discounted, but expect money
center banks will likely continue to trade at a discount to the regionals. Our 1x TBV
multiple represents a 0.3x discount to our median multiple for our universe. Our
discount to TBV is a reflection of the earnings drag from Holdings and the fact that
money centers will most likely continue to trade at a discount to regional peers. Our 11x
16E multiple is based on a sum of the parts analysis, where we apply a 10.5x multiple,
on all operations ex. Lat Am and Asia GCB. We then apply a 11x multiple on Lat Am and
Asia GCB to represent the earnings growth for consumer banking in emerging markets.
Lastly, we deduct the earnings drag from Holdings. Our DCF analysis assumes a 5%
growth rate and two stage cost of equity of 13%.
Risks to our PO are macro risks such as a slower than expected rate of fed hikes, and
economic downturn and further scrutiny of the financials industry. Specific to C, risks
are enhanced regulatory and capital standards as a Global SIFI, slower wind-down on Citi
Holdings than expected, and slower-than-expected growth in the emerging markets and
potential fines.
Citizens Financial Group (CFG)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $33 price
objective and assign a 1.2x multiple to our 2017E TBV in-line with other asset sensitive
peers. We place a 15x multiple on our 2017E EPS, also in-line with its asset sensitive
peer group. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 5%.
Downside risks to our price objective are: 1) a significantly delayed Fed rate hike leading
to pressured revenue growth, 2) higher losses associated with CFG's consumer oriented
loan portfolio, and 3) a quicker than expected credit normalization.
Comerica Incorporated (CMA)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO,
and assign a 1.2x multiple to 2017E TBV (in line with the median energy-exposed peers)
and 16x multiple on 2017E EPS due to below peer EPS growth and ROTE. We have
weighted the P/E and P/TBV factors equally at 33%, and our DCF analysis by 33%. Our
DCF assumes a two-stage cost of capital of 12.3% and 10.5% and a terminal growth
rate of 5% and Tier 1 common of 8% at termination.
Downside risks to our PO are a more severe than expected impact from lower energy
prices, or a slower than expected rate of fed hikes. Upside risks are a better than
expected rebound in energy prices and sooner recognition of cost saves.
Commerce Bancshares Inc. (CBSH)
We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $60 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to
peers, given higher-quality earnings and capital position. Our assigned 18x multiple on
2017E EPS is at a premium to peers due to higher earnings quality. Our DCF assumes a
terminal cost of equity of 9%, and a terminal growth rate of 3%.
Downside risks to our price objective are regulatory headwinds, or longer-thananticipated
low-rate environment. Upside risks are a stronger-than-expected economic
rebound, better-than-expected capital distribution and a potential takeout above our
price objective.
66 2016 Future of Financials Conference | 17 November 2016
Cullen/Frost Bankers Inc (CFR)
To arrive at our $74 price objective, we employed a three-factor valuation methodology
that incorporates target P/E, target P/TBV and a DCF model. For our P/E valuation, we
apply a 15x earnings multiple on CFR's 2017E core earnings. For our P/TBV valuation,
we apply a 1.7x tangible book multiple to CFR's 2017E tangible book. Both multiples are
lower than peers for CFR due to EPS headwinds and rising credit costs from lower
energy prices. For our DCF analysis, we use a net income growth of 3.0% and assume a
beta of 1.0 in the terminal stage.
Upside risks to our PO: a sharp rebound in oil prices, higher than expected interest rates,
stronger loan growth, better than expected credit performance of CFR's energy loan
portfolio. Downside risks: A worse than expected decline in Texas economic growth that
impacts CFR's balance sheet growth, a slower than expected pace or rate hikes and a
worse than expected sell off in oil prices.
East West Bancorp, Incorporated (EWBC)
Our three-pronged valuation methodology (target P/E, target P/TBV, and DCF analysis)
drives our price objective of $50. We assumes a 16.0x P/ 2017e EPS and a target P/TBV
of 2.0x to 2Q17E tangible book given our forecast above peer EPS growth. Our DCF
assumes a two-stage cost of capital of 9.5% and a terminal growth rate of 3% Upside
risks to our PO are a quick economic recovery (led by stabilization or appreciation in CA
housing values) or a faster than expected recovery in China. Downside risk to our PO is
an even deeper economic slowdown driving corporate losses higher than we currently
anticipate, faster than expected normalization in credit.
Eaton Vance (EV)
Our $35 price objective is based on a target P/E of 15x calendar 2016E (14x '17E), at a
discount to our asset-manager group target multiple, given recent outflows from high
fee products, offset by distinct products in areas such as floating rate and overlay.
Downside risks to our price objective are market depreciation and investment underperformance,
as for all asset managers, and (should the economy slow) concentration in
some credit areas, such as bank loan funds, high yield and longer-duration munis. Upside
risks are improving performance, flows, or future traction from EV's ETF licensing
initiative.
FCB Financial Holdings, Inc (FCB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $44 price
objective and assign a 1.6x multiple to our 2017E TBV given that we believe the market
would pay a 0.3x premium for FCB's 2016 estimated returns in line with the median
premium of its peer group (Florida banks, High Growth, Bank Acquisition, and SMIDs).
We place a 18x multiple on our 2017E EPS, a premium to its SMIDs peers given our
outlook for stronger EPS growth. Our DCF assumes a two-stage cost of capital of 10%
and a terminal growth rate of 3%.
Downside risks to our price objective are a deterioration in credit quality in FCB's
unseasoned newly originated loan portfolio, a downturn in the Florida economy, and
continued competition for C&I loans. Upside risks are a better than expected
improvement in its return profile and a much stronger economic improvement in the
Florida economy.
Fifth Third Bank (FITB)
Our PO of $26 is predicated on target P/E multiple of 15x to reflect higher confidence
in FITB achieving most of its profit improvement goals related to Project North Star.
This represents a modest premium versus peers. Downside risks to our PO are a
prolonged low interest rate environment, expensive M&A and slower than guided loan
growth on weaker economic activity.
2016 Future of Financials Conference | 17 November 2016 67
First Bancorp Puerto Rico (FBP)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $6.50 price
objective. We assign a 1.0x multiple to our 2Q17E TBV, below the 1.6X for peers, due to
the overhang of PR fiscal issues that may reduce TBV. Our revised implied 2Q17E TBV
of 1.0x is consistent with a 5% ROE. We assign a 10x multiple to our 2017E EPS, in line
with peers. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 3%.
Downside risks to our price objective are a worse-than-expected restructuring of PR
government debt, deterioration in the Puerto Rican economy that could hurt the ongoing
credit and earnings recovery at FBP, a change in management's strategy to dispose
troubled assets, and potential regulatory risk stemming from the ongoing
implementation of the Dodd-Frank financial rules. Upside risks to our price objective are
a much stronger economic improvement in Puerto Rico and a better-than-expected
improvement in asset quality trends at FBP.
First Hawaiian Inc. (FHB)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $31 PO
and assign a 2.2x multiple to 2017E TBV and 17x multiple on 2017E EPS, representing
premium target multiples for the median smid-cap banks under coverage. We have
weighted the P/E and P/TBV factors equally.
A superior profitability profile suggests an above peer multiple. Our DCF assumes a twostage
cost of capital of 8% and a terminal growth rate of 4%.
Risks include 1) FHB's reliance on the Hawaiian economy with 80% of the franchise
spread across Hawaii, Guam, and Saipan poses downside risk to EPS from a severe
economic downturn in this region. 2) While FHB has a history of conservative
underwriting its exposure to auto loans could serve as an overhang if investor concerns
around the health of the auto sector and consumer increase. 3) Expectations for
continued divestiture by French bank BNP (owns 82% of shares o/s) could temper stock
performance.
First Horizon National Corp. (FHN)
We use a three-prong valuation framework (P/E, P/TBV, DCF) to arrive at our $16 price
objective and assign a 1.5x multiple to 2Q17E TBV and a 14x multiple to 2017E EPS
(inline with median for our mid-to-small cap universe). We believe that this valuation
discount is warranted given the below average earnings growth that we forecast for
FHN. Our P/TBV and P/E targets reflect our expectation that earnings growth and
profitability will remain challenged by a low growth low interest rate environment. Our
DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%.
Downside risks to our price objective are a double dip in home prices and slower
residential real estate recovery. Upside risks are FHN being taken out above our price
objective and better performance in the economy than we expect.
Franklin Financial Network, Inc. (FSB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $36 price
objective and assign a 1.8x multiple to our 2Q17E TBV, given that we believe the market
would pay no premium for FSB's 2016 estimated returns of 14%, below the median of
its peer group (High performing, Southeast peers, and SMIDs). We place a 14x multiple
on our 2017E EPS, a premium to its peer group given above average expected EPS
growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth
rate of 3%.
Downside risks to our price objective are: 1) execution risk leading to slower than
expected loan growth or lower than expected improvement in the efficiency ratio, 2)
68 2016 Future of Financials Conference | 17 November 2016
downturn in the local real estate markets affecting Franklin's construction loans and
increasing credit costs via higher charge-offs and provisions, and 3) inability to
effectively fund asset growth driving greater than expected compression in the net
interest margin.
Goldman Sachs (GS)
We value the brokers based on the relationship between ROE (return on equity) and PB
(price to book), which has a high historical correlation. Our $230 PO is based on a target
PB multiple of 1.2x our forward book value estimate, which is above our 2017E ROE of
roughly 10% as we add in higher interest rate expectations and loosening regulations
into our multiple.
Risks to the downside are a weaker economy/capital markets, increased macro issues,
tougher regulation, and litigation, while risks to the upside are a stronger economy,
moderating macro risks, market share gains, and less onerous regulatory and legal
issues.
Great Western Bancorp Inc (GWB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $42 price
objective and assign a 2.0x multiple to our 2Q17E TBV given that we believe the market
would pay premium for GWB's 2016 estimated returns of 15%, in line with the median
premium of its peer group (High performing, Midwest peers, and SMIDs). We place a 16x
multiple on our 2017E EPS, a premium to its peer group given higher quality earnings.
Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%.
Downside risks to our price objective are a prolonged downturn in the farm sector and
lower for longer interest rate environment. Upside risks are a better than expected
improvement in the farming industry and a much stronger economic improvement in the
Midwest economy.
Hancock Holding (HBHC)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $41 price
objective. We assign a 1.5x multiple to our 2Q17E TBV, in line with SMID-cap peers
based on their in-line return profile, and this translates to $35.75. We place a 14.5x
multiple on our 2017E EPS, in line with other peers based on forecasted EPS growth, for
$33. Our DCF assumes a two-stage model with terminal growth rate of 3.5% and a cost
of capital of 8.5% to derive our $35 PO.
Downside risks to our price objective are regulatory issues, slowing growth and if M&A
synergies do not materialize. Upside risks are better than expected cost saves, stronger
loan growth that would lead to better than forecast spread revenue and lower credit
costs.
Huntington Bancshares Inc. (HBAN)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $13
and assign a 1.8x multiple to 2017E TBV and a 14x multiple on 2017E EPS, below
historical multiples. This is due to more stringent capital standards and the negative fee
income impact of pending regulatory reform. Our DCF analysis uses a cost of equity of
15.7% in the first stage and 11% in the second stage, and a terminal growth rate of 3%.
Risks to our price objective are an inability to offset regulatory fee income headwinds
and integration risk associated with FMER. Other risks are an inability to return capital
to shareholders in a timely fashion or overpaying for an acquisition target.
IBERIABANK Corp (IBKC)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $85 price
objective and assign a 1.6x multiple to our 2Q17E TBV, in line with multiples of other
2016 Future of Financials Conference | 17 November 2016 69
high growth peers. We place a 16x multiple on our 2017E EPS in line with SMID peers.
Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%.
Downside risks to our price objective are worse than expected decrease in oil prices,
regulatory issues, deteriorating credit quality, and if M&A synergies do not materialize.
Upside risks are sooner than expected recovery in the oil price, faster than expected rate
hikes or better than expected improvement in the US economy.
Invesco (IVZ)
Our $36 price objective is based on a target P/E multiple of 14x our 2017E, which is
above IVZ's historical valuation relative to the group given expectations for superior
organic growth. Risks to our price objective are market depreciation and investment
underperformance, as for all asset managers, along with volatile flows in IVZ's passive
strategies, non-US currency and market risk.
JPMorgan Chase & Co. (JPM)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $83 PO,
assigning a 1.5x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Near term, we view JPM's current market P/E multiple as overly discounted, but expect
money center banks will likely continue to trade at a discount to the regionals. Our 11x
multiple is a 2x discount to our median multiple as we believe in the near future, money
centers will continue to trade at a discount to regional peers. Our DCF assumes a twostage
cost of capital of 10% and a terminal growth rate of 4%.
Risks to our price objective are macro risks such as a longer than expected low interest
rate environment and further regulation and scrutiny of the financials industry. Specific
to JPM, risks are enhanced regulatory and capital standards as a Global SIFI, mortgage
putback risk, material decline in investment banking/trading profitability, and increased
litigation on matters such as private label securitization, foreclosures, etc.
Key Corp (KEY)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $18 PO
and assign a 1.4x multiple to 2017E TBV and 15x multiple on 2017E EPS, in-line with its
peer group due to near median profitability and EPS growth. Our DCF assumes a two
stage cost of capital of 13.4% and 10.9% and a terminal growth rate of 5% and Tier 1
common of 8% at termination.
Downside risks to our PO are a prolonged low interest rate environment, greater than
expected expenses, inability to maximize balance sheet efficiency, and the
announcement of expensive deals.
KKR & Co. (KKR)
Our price objective (PO) for KKR is $17, which results in a target price-to-ENI (P/ENI or
P/E) multiple of 10x our 2017 economic net income (ENI) estimate. Our price objective
is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the
following components: a target multiple on fee related earnings (11x - discount to asset
manager multiples given revenue mix), a discount to book value for the balance sheet
investments and accrued carry given markets, and a discounted value on the
performance fee upside over a cycle. Based on this method, we value the fee related
earnings at $6/unit, the balance sheet (principal investments and accrued carry) at
$9/unit, and the discounted value of future carry income and investment income at
$2/unit, which equates to a total value of $17, in line with our price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, regulatory and political risk, poor
70 2016 Future of Financials Conference | 17 November 2016
performance, weak fundraising, principal investment and balance sheet risk, expansion
risk, key person and talent risk, competition, a unique corporate structure that limits
shareholder control, and share lock-ups that could weigh on the stock.
Legg Mason (LM)
Our $36 price objective is based on a target P/E multiple of 12x our calendar '17E, a
discount to the group, given financial leverage, muted flows, and deal/integration risk.
Downside risks to our price objective: an equity sell-off or weakening flows, which
would pressure AUM and revenues. A return to past under-performance at key affiliates
is also a risk for Legg, given its fragile recovery and brand issues. Given their affiliate
model there are integration risks. Upside risks to our price objective are better than
expected equity markets, performance, or flows, or an accretive acquisition.
Morgan Stanley (MS)
We value the brokers based on the relationship between ROE (return on equity) and PB
(price to book), which has a high historical correlation. Our $43 PO is based on a target
PB multiple of 1.3x our forward book value estimate, which is above our 2017E ROE of
roughly 8% as we add in higher interest rate expectations and loosening regulations into
our multiple.
Risks are a weak economy, low rates for longer, a significant reduction in capital
markets activity, weak returns, another shock to the financial system, ongoing
competition and talent risk, tighter regulation, significantly higher capital requirements,
and ongoing litigation risks.
New York Community Bancorp (NYCB)
Our price objective is $17 and we use a three factor valuation model equally weighing
valuations using P/E, P/TBV and DCF models. To arrive at our P/E valuation, we assign a
14x multiple to our blended '17e EPS or inline with the median of other CCAR banks
with $50-100bn in assets. To arrive at our P/TBV valuation we applied a 2.2x multiple to
our 2Q17E TBV, a premium to NY/Thrift and smid cap peers given NYCB's superior
return profile. We arrive at our DCF valuation using we assume a 2% terminal growth
rate and a WACC of 8%.
Upside risks to our price objective are: 1) Change in SIFI threshold could drive a relief
rally, 2) Lower for longer rate backdrop, and 3) A period of heightened market volatility.
Downside risks to our price objective are: 1) worse than expected impact on ROTE from
increased capital standards from obtaining the SIFI designation and 2) higher than
expected impact from increasing rates on funding cost.
Prosperity Bancshares Inc (PB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $58 price
objective. We assign a 1.8x multiple to our 2Q17E TBV (40% weight) compared to 1.1x
median of TX peers. We believe the 0.7x premium to Texas peers is warranted given
PB's above average return on tangible equity (ROTE) profile. We place a 14x multiple on
2017E EPS, in line with historical P/E median (40% weight) net of accretable yield. Our
DCF valuation ((20% weight) suggests a fair value of $45. Our DCF assumes a terminal
growth rate of 3% and cost of capital of 9.9%.
Risks to our price objective are worse than expected drop in the price of oil, better than
expected macro environment and increasing rates which offset the effects of lower oil
prices, or inability to close an M&A deal due to regulatory or capital constraints.
Regions Financial (RF)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $13 price
objective and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS. Our
2016 Future of Financials Conference | 17 November 2016 71
estimates imply RF would generate ROTEs of 10-11% in 2016-2017E, hence we find RF
fairly valued at 1.3x TBV. Our 13x multiple is in-line with large regional peers. Our DCF
assumes a two-stage cost of capital of 13.6% and 10.5% and a terminal growth rate of
6.5% and Tier 1 common of 8% at termination.
Downside risks to our PO are a slower-than-expected credit recovery, and the Fed on
hold for a longer period of time.
Signature Bank (SBNY)
We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our $160 PO and assign a 2.1x multiple to 3Q17E TBV, representing a premium to the
group, which we believe is appropriate given a stronger profitability and capital profile,
and above-peer-growth prospects. Our 16.1x multiple on 2017E is higher than peers
given consistent above peer growth. Our DCF assumes a two-stage cost of capital of
10% and a terminal growth rate of 4%.
Risks to our price objective are required provisioning at higher-than-forecast levels,
further deterioration in rental income for commercial properties, and a longer-thananticipated
low-rate environment.
SunTrust Banks, Inc. (STI)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $53 PO,
assigning a 1.7x multiple to 2017E TBV and 14.5x multiple on 17E EPS. Above peer
P/TBV due to their above median profitability, and below peer P/E due to their below
median EPS growth. We have weighted the P/E and P/TBV factors equally at 40%, and
our DCF analysis by 20%.
Our DCF assumes a two-stage cost of capital of 12% and a terminal growth rate of 4%.
Risks to our price objective are macro risks, such as a slower than expected rate
increase. Upside risks are higher-than-expected capital return, a general beta rally for
bank stocks, and faster recognition of "normalized" earnings.
SVB Financial Group (SIVB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $165 price
objective and assign a 1.8x multiple to our 2Q17E TBV and apply a 17x P/E to 17E EPS.
Our valuation multiples are both in line with high growth peers due to SIVB's high
profitability and EPS growth profile. Our DCF assumes a two-stage cost of capital of
9.5% and a terminal growth rate of 6%.
Downside risks are a longer than expected low rate environment and a slowdown in the
technology sector and related IPO activity. Upside risks are sooner than expected rate
hike, or better than expected pickup in the tech sector.
Synovus Financial Corp. (SNV)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $40 price
objective and assign a 1.7x multiple to our forward 2Q17 TBV, given peers are currently
trading higher and a discount is warranted given their lower return profile. We place a
15x multiple on 2017E EPS, in line with the historical median for the stock. Our DCF
assumes a two-stage cost of capital of 9%, and a terminal growth rate of 3%.
Downside risks to our price objective are potentially slower-than-expected economic
growth in their footprint or a potential takeout price that is lower than where the stock
is trading today. Upside risks to our price objective are a quicker pick-up in capital return
than we are expecting and SNV being acquired above our price objective.
TCF Financial Corp. (TCB)
72 2016 Future of Financials Conference | 17 November 2016
We use an equal weighted, three-factor valuation framework (P/E, P/TBV, DCF) to arrive
at our PO of $14. We assigned a 1.2x multiple to 2Q17E TBV and a 12x multiple on
2017E EPS, with lower PTBV/PE multiple than peers assigned due to the higher
perceived risk of their lending model. Our DCF assumes a two-stage cost of capital of
9.4% and 11.5% and a terminal growth rate of 2%.
Upside risk to our price objective is a less onerous residential real estate cycle favorably
benefiting credit provision forecasts. Downside risks are a double dip in home prices
and a prolonged low rate environment.
Texas Capital Bancshares Inc. (TCBI)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $74 price
objective and assign a 1.7x multiple to our 2Q17E TBV, below high growth peers due to
possible losses as a result of the downturn in energy prices. We place a 17x multiple on
our 2017E EPS, below TCBI's historical pre-crisis P/E multiple based on possible EPS
headwinds from their energy exposures. Our DCF assumes a two-stage cost of capital of
10% and a terminal growth rate of 4%.
Downside risks to our price objective are lower than expected oil prices and a slowdown
in economic activity in Texas. Upside risk to our price objective is better than expected
ramp up in MCA business, and sooner than expected hike in rates, faster than expected
recovery in oil prices.
The Blackstone Group (BX)
Our price objective (PO) for Blackstone is $29, which results in a target price-to-ENI
(P/ENI or P/E) multiple of 12x our 2017 ENI estimate. Our price objective is based on
our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following
components: a target multiple on fee related earnings (16x - roughly in line with or a
premium to top tier asset manager multiples given healthy growth and sticky assets),
book value for the balance sheet investments and accrued carry, and a discounted value
on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value
the fee related earnings at $14/unit, the balance sheet (principal investments and
accrued carry) at $6/unit, and the discounted value of future carry income and
investment income at $9/unit, which equates to a total value of $29, in line with our
price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax
laws related to carried interest and partnerships, legal and political risk, increased
regulation, poor performance, weak fundraising, expansion risk, key person and talent
risk, competition, and a unique corporate structure that limits unitholder control.
The Carlyle Group (CG)
Our price objective (PO) for Carlyle is $18, which implies a target price-to-ENI (P/ENI or
P/E) multiple of 13x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts
(SOTP) analysis. Our SOTP analysis is based on the following components: a
target multiple on fee-related earnings (16x, roughly in line with or a premium to asset
manager multiples given growth outlook), book value for the balance sheet investments
and accrued carry, and a discounted value on the performance fee upside over a cycle
(1.5x MOIC). Based on this method, we value the fee-related earnings at $4 share, the
balance sheet at $5 share, and incentive upside at $9 share, which equates to a total
value of $18, in line with our price objective.
Risks to our PO: a weak macro and capital markets backdrop, potential changes in
carried interest and partnership tax laws, regulatory and political risk, poor performance,
weak fundraising, expansion risk, key person and talent risk, competition, a unique
corporate structure that limits shareholder control, a limited float, and share lock-ups
that could weigh on the stock.
2016 Future of Financials Conference | 17 November 2016 73
The PNC Financial Services Group, Inc. (PNC)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $110 PO
and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS, in line with
target multiples for the median large regional banks under coverage. We have weighted
the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
A superior profitability profile suggests an above peer multiple - however, a challenging
macro backdrop and specific industry headwinds restrain our P/E target. Our DCF
assumes a two-stage cost of capital of 9.6% and 11.2% and a terminal growth rate of
4%.
Risks are macro risks such as a lower for longer rate environment, the implementation
of a strict liquidity coverage ratio and further regulation on overdraft income that
restricts bank profitability.
U.S. Bancorp (USB)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $50 PO,
assigning an above peer 2.8x multiple to 2017E TBV and near median 14.5x multiple on
2017E EPS due to their above median profitability. We have weighted the P/E and
P/TBV factors equally at 40%, and our DCF analysis by 20%. Our DCF assumes a twostage
cost of capital of 9.5% and 10.9% and a terminal growth rate of 5%.
Risks to our price objective are macro risks such as a double dip recession, the
implementation of a strict liquidity coverage ratio and further regulation on overdraft
income that restricts bank profitability. Specific to USB, risks are enhanced regulatory
scrutiny and capital standards as a Domestic SIFI and an announcement of a large
expensive deal that could weigh on the stock price.
UMB Financial Corporation (UMBF)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $78 price
objective and assign a 1.8x multiple to our 2Q17E TBV, in-line with peers, and we place
a 18x multiple on our 2017E EPS, above peers given our above median EPS growth
forecast. Our DCF model assumes cost of equity of 8% and a terminal growth rate of
4%.
Downside risks to our price objective are continued rising long rates, which could
negatively impact the company's sizable securities book and erode tangible book value.
In addition, a sudden outflow of deposits could impact EPS and the asset sensitivity of
UMBF's balance sheet to higher interest rates. Upside risks to our price objective are a
much faster asset mix change into higher yielding loans that significantly increases its
net interest margin.
Wells Fargo & Company (WFC)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO,
assigning a 1.75x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have
weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 1.6x TBV multiple represents a 0.3x premium to our mega-cap median multiple, but
we believe this is justified due to WFC's superior returns on tangible equity (ROTE
consistent between 13%-14% throughout our forecast period, versus 12% for peers).
Our 12x EPS multiple is in line with our mega-cap median multiple. We believe WFC
deserves to trade at a premium due to better earnings growth, but we are assuming
WFC trades in line with peers due to a higher percentage of earnings from mortgage
banking and accretable yield, as well as potentially greater regulatory scrutiny as the
second largest US depository. Our DCF assumes a two-stage cost of capital of 11% and
a terminal growth rate of 4%.
74 2016 Future of Financials Conference | 17 November 2016
Downside risks to our price objective are an economic slowdown and the final
implementation of a strict liquidity coverage ratio. Specific to WFC, risks are enhanced
regulatory scrutiny and capital standards as a Global SIFI, and issues surrounding its
cross selling.
Zions Bancorp (ZION)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $36 price
objective and assign a 1.2x multiple to 2017E TBV. Our 16x P/E multiple, which we apply
on 2017E EPS along with debt extinguishment upside, is 1x higher than its historical
median due to low interest rates. Our DCF assumes a two-stage cost of capital of
16.1% and 11.6% and a terminal growth rate of 8%.
Upside risks to our price objective are more robust economic recovery and less onerous
post cycle reserve requirements. Downside risks are a slowdown in housing price
appreciation and a prolonged low interest rate environment.
Analyst Certification
We, Erika Najarian, Ebrahim H. Poonawala, Kenneth Bruce and Michael Carrier, CFA,
hereby certify that the views each of us has expressed in this research report accurately
reflect each of our respective personal views about the subject securities and issuers.
We also certify that no part of our respective compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or view expressed in this research
report.
Special Disclosures
BofA Merrill Lynch is currently acting as financial advisor to KKR and the Company in
connection with its proposed sale of a majority stake in SMCP Group to Shandong Ruyi
Group. The signing of an exclusivity agreement between the parties was announced on
31 March 2016.
BofA Merrill Lynch is currently acting as financial advisor to Huntington Bancshares Inc
in connection with Huntington and FirstMerit Corp's proposed sale of 13 bank branches
in Stark and Ashtabula counties to First Commonwealth Bank, a subsidiary of First
Commonwealth Financial Corp, which was announced on July 27, 2016.
BofA Merrill Lynch is currently acting as financial advisor to Blackstone Group LP in
connection with its proposed acquisition of Team Health Holdings Inc, which was
announced on October 31, 2016. The proposed transaction is subject to approval by
shareholders of Team Health Holdings Inc. This research report is not intended to (1)
provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3)
result in the procurement, withholding or revocation of a proxy.
BofA Merrill Lynch is currently acting as financial adviser to Blackstone Real Estate
Partners Europe IV and Blackstone Real Estate Partners VIII (jointly “Blackstone”)
through its entity Vega Holdco Sarl in connection with a proposed offer to acquire a
controlling stake of D. Carnegie & Co. AB, which was announced on 15 July 2016. The
transaction will, if completed eventually result in Blackstone passing the threshold for a
mandatory offer obligation.
BofA Merrill Lynch is currently acting as financial advisor to Ares Capital Corp. in
connection with its proposed acquisition of American Capital, Ltd., which was
announced on May 23, 2016. Ares Management L.P. will provide financial support to the
transaction. The proposed transaction is subject to approval by shareholders of
American Capital ltd. and Ares Capital Corp. This research report is not intended to (1)
provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3)
result in the procurement, withholding or revocation of a proxy.
2016 Future of Financials Conference | 17 November 2016 75
US - Brokers, Asset Managers, & Exchanges Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Affiliated Mgrs. AMG AMG US Michael Carrier, CFA
AllianceBernstein AB AB US Michael Carrier, CFA
BlackRock, Inc. BLK BLK US Michael Carrier, CFA
Charles Schwab Corp. SCHW SCHW US Michael Carrier, CFA
CME Group CME CME US Michael Carrier, CFA
Cohen & Steers CNS CNS US Michael Carrier, CFA
Goldman Sachs GS GS US Michael Carrier, CFA
Houlihan Lokey HLI HLI US Michael Carrier, CFA
IntercontinentalExchange ICE ICE US Michael Carrier, CFA
Invesco IVZ IVZ US Michael Carrier, CFA
KKR & Co. KKR KKR US Michael Carrier, CFA
Legg Mason LM LM US Michael Carrier, CFA
Morgan Stanley MS MS US Michael Carrier, CFA
Oaktree Capital Group OAK OAK US Michael Carrier, CFA
Old Mutual Asset Management OMAM OMAM US Michael Carrier, CFA
TD Ameritrade AMTD AMTD US Michael Carrier, CFA
Apollo Global Management APO APO US Michael Carrier, CFA
Ares Management ARES ARES US Michael Carrier, CFA
E*TRADE Financial ETFC ETFC US Michael Carrier, CFA
Franklin Resources BEN BEN US Michael Carrier, CFA
Janus Capital JNS JNS US Michael Carrier, CFA
Nasdaq Inc NDAQ NDAQ US Michael Carrier, CFA
Och-Ziff OZM OZM US Michael Carrier, CFA
T. Rowe Price TROW TROW US Michael Carrier, CFA
The Blackstone Group BX BX US Michael Carrier, CFA
The Carlyle Group CG CG US Michael Carrier, CFA
WisdomTree WETF WETF US Michael Carrier, CFA
Artisan Partners APAM APAM US Michael Carrier, CFA
CBOE Holdings CBOE CBOE US Michael Carrier, CFA
Eaton Vance EV EV US Michael Carrier, CFA
Federated Inv. FII FII US Michael Carrier, CFA
Virtus Investment Partners VRTS VRTS US Michael Carrier, CFA
Waddell & Reed WDR WDR US Michael Carrier, CFA
Bats Global Markets, Inc. BATS BATS US Michael Carrier, CFA
76 2016 Future of Financials Conference | 17 November 2016
US - Specialty Financial Services Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
RVW
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Apollo Commercial Real Estate Finance ARI ARI US Kenneth Bruce
Ares Commercial Real Estate Corp. ACRE ACRE US Kenneth Bruce
Blackstone Mortgage Trust Inc BXMT BXMT US Kenneth Bruce
Compass Diversified Holdings CODI CODI US Derek Hewett
Ladder Capital Corp. LADR LADR US Kenneth Bruce
MGIC Investment Corp. MTG MTG US Mihir Bhatia
New Residential Investment NRZ NRZ US Kenneth Bruce
Radian Group Inc RDN RDN US Mihir Bhatia
Starwood Property Trust, Inc. STWD STWD US Kenneth Bruce
TCP Capital Corp. TCPC TCPC US Derek Hewett
TPG Specialty Lending, Inc. TSLX TSLX US Derek Hewett
AGNC Investment Corp AGNC AGNC US Kenneth Bruce
Ally Financial Inc. ALLY ALLY US Kenneth Bruce
Amer Express AXP AXP US Kenneth Bruce
Annaly Capital NLY NLY US Kenneth Bruce
CIT Group Inc. CIT CIT US Derek Hewett
Discover Financial Services DFS DFS US Kenneth Bruce
Golub Capital BDC, Inc. GBDC GBDC US Derek Hewett
MasterCard Inc MA MA US Kenneth Bruce
PayPal PYPL PYPL US Kenneth Bruce
PennyMac Financial Services, Inc. PFSI PFSI US Kenneth Bruce
Synchrony Financial SYF SYF US Kenneth Bruce
Visa Inc. V V US Kenneth Bruce
Apollo Investment Corporation AINV AINV US Derek Hewett
Capital One COF COF US Kenneth Bruce
Credit Acceptance Corp. CACC CACC US Kenneth Bruce
Essent Group ESNT ESNT US Mihir Bhatia
Goldman Sachs BDC, Inc. GSBD GSBD US Derek Hewett
OneMain Holdings, Inc. OMF OMF US Kenneth Bruce
PennyMac Mortgage Investment Trust PMT PMT US Kenneth Bruce
Santander Consumer USA Inc. SC SC US Kenneth Bruce
American Capital, Ltd. ACAS ACAS US Derek Hewett
Ares Capital Corporation ARCC ARCC US Derek Hewett
AG Mortgage Investment Trust, Inc. MITT MITT US Kenneth Bruce
ARMOUR Residential REIT, Inc ARR ARR US Kenneth Bruce
CYS Investments, Inc CYS CYS US Kenneth Bruce
Ellington Financial LLC EFC EFC US Kenneth Bruce
Hannon Armstrong HASI HASI US Kenneth Bruce
Invesco Mortgage Capital, Inc. IVR IVR US Kenneth Bruce
Two Harbors Investment Corp. TWO TWO US Kenneth Bruce
Western Asset Mortgage Corp WMC WMC US Kenneth Bruce
2016 Future of Financials Conference | 17 November 2016 77
US - Banks Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
BankUnited, Inc. BKU BKU US Ebrahim H. Poonawala
BB&T Corporation BBT BBT US Erika Najarian
Capital Bank Financial Corp. CBF CBF US Erika Najarian
Citigroup Inc. C C US Erika Najarian
Citizens Financial Group CFG CFG US Erika Najarian
East West Bancorp, Incorporated EWBC EWBC US Ebrahim H. Poonawala
FCB Financial Holdings, Inc FCB FCB US Ebrahim H. Poonawala
Great Western Bancorp Inc GWB GWB US Ebrahim H. Poonawala
Huntington Bancshares Inc. HBAN HBAN US Erika Najarian
IBERIABANK Corp IBKC IBKC US Ebrahim H. Poonawala
JPMorgan Chase & Co. JPM JPM US Erika Najarian
Key Corp KEY KEY US Erika Najarian
New York Community Bancorp NYCB NYCB US Ebrahim H. Poonawala
Signature Bank SBNY SBNY US Ebrahim H. Poonawala
SunTrust Banks, Inc. STI STI US Erika Najarian
SVB Financial Group SIVB SIVB US Ebrahim H. Poonawala
The PNC Financial Services Group, Inc. PNC PNC US Erika Najarian
UMB Financial Corporation UMBF UMBF US Ebrahim H. Poonawala
Wells Fargo & Company WFC WFC US Erika Najarian
Banc of California BANC BANC US Ebrahim H. Poonawala
Commerce Bancshares Inc. CBSH CBSH US Ebrahim H. Poonawala
Fifth Third Bank FITB FITB US Erika Najarian
First Bancorp Puerto Rico FBP FBP US Ebrahim H. Poonawala
First Hawaiian Inc. FHB FHB US Ebrahim H. Poonawala
Franklin Financial Network, Inc. FSB FSB US Ebrahim H. Poonawala
Hancock Holding HBHC HBHC US Ebrahim H. Poonawala
M&T Bank MTB MTB US Erika Najarian
Regions Financial RF RF US Erika Najarian
Synovus Financial Corp. SNV SNV US Ebrahim H. Poonawala
Texas Capital Bancshares Inc. TCBI TCBI US Ebrahim H. Poonawala
U.S. Bancorp USB USB US Erika Najarian
Associated Banc-Corp ASB ASB US Ebrahim H. Poonawala
Bank of Hawaii Corp. BOH BOH US Ebrahim H. Poonawala
Comerica Incorporated CMA CMA US Erika Najarian
Cullen/Frost Bankers Inc CFR CFR US Ebrahim H. Poonawala
First Horizon National Corp. FHN FHN US Ebrahim H. Poonawala
Prosperity Bancshares Inc PB PB US Ebrahim H. Poonawala
TCF Financial Corp. TCB TCB US Ebrahim H. Poonawala
Zions Bancorp ZION ZION US Erika Najarian
First Republic Bank FRC FRC US Erika Najarian
Disclosures
Important Disclosures
Equity Investment Rating Distribution: Banks Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 81 43.55% Buy 74 91.36%
Hold 45 24.19% Hold 41 91.11%
Sell 60 32.26% Sell 56 93.33%
78 2016 Future of Financials Conference | 17 November 2016
Equity Investment Rating Distribution: Financial Services Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 113 46.89% Buy 89 78.76%
Hold 66 27.39% Hold 55 83.33%
Sell 62 25.73% Sell 40 64.52%
Equity Investment Rating Distribution: Global Group (as of 30 Sep 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1553 49.44% Buy 1130 72.76%
Hold 730 23.24% Hold 538 73.70%
Sell 858 27.32% Sell 514 59.91%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A
stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12
month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be
referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays
no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s
coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-Corp, Banc of