Capital Markets at Risk: Jefferies echoing Bear Stearns
Financials
Charles Peabody believes we are in the mature phase of the capital markets cycle, with revenues likely topping out in 2026, while stocks are expected to turn lower well before then. He recommends selling Morgan Stanley and Goldman Sachs on near-term strength. Credit and liquidity stresses are emerging following the automotive credit, Tricolor and First Brands developments, while syndicated loan offerings are being pulled. He sees echoes of Bear Stearns at JEF, noting that MS and BlackRock have ended relations with Bonita Point, the JEF subsidiary housing First Brands receivables, just as this rapidly growing broker reached top-tier status. Sell Capital Markets, Buy NII - he favours Citi, M&T, Citizens Financial and UBS.
Edition: 222
- 17 October, 2025
The secular bull market for Banks gets a midyear tailwind
Financials
US bank stocks can continue to hit new highs and assume a leadership role in the market, according to Charles Peabody. Fundamentals are excellent, balance sheets are strong and capital is abundant. Meanwhile, the next 12-18 months will likely include a reduction in capital requirements as part of the deregulation process. Reducing the CET1 ratio by 1% can add double digit earnings growth to banks either through buybacks or growing earning assets. Deregulation can also reduce expenses by 1-3% annually. While this process is in place, investors have become accustomed to one way headaches from regulators, and thus, deregulation is only reflected in stock prices after it happens. Charles' top picks are Citigroup, M&T Bank and Citizens Financial.
Edition: 215
- 11 July, 2025
US: The next credit cycle problem
Charles Peabody has received considerable feedback on his recent piece on “Parallels with the Panic of 1907”. When asked why he firmly believes that private capital (private equity and private credit) will house the epicentre of the next credit cycle his answer is quite simple. To paraphrase Willie Sutton – “Because that’s where the money went”. When the Fed grew its balance sheet from less than $1 trillion to over $4T following the GFC, Dodd-Frank imposed constraints and massive capital requirements on the banks. When the Fed balance sheet doubled again to $9T following Covid, private capital continued to benefit during the lowest interest rate cycle in history. The economic dislocation from Liberation Day tariffs in 2025 can be equivalent to the San Francisco earthquake and fire that led to the failure of the Knickerbocker Trust in 1907.
Edition: 210
- 02 May, 2025
Financials
MTB has some of the best banking DNA that Charles Peabody is aware of. This includes a unique community bank strategy; impressive leadership; strong balance sheet with excess capital (unimpaired by unrealised bond losses); excess liquidity (available to be reinvested into higher yield asset opportunities); improving credit outlook; and good earnings momentum (forecasts DD EPS growth in each of the next 2 years). Charles expects MTB to generate a mid-teen RoTCE. The bank has grown TBV at an 8% CAGR over a multi-decade period and he forecasts TBV growth to accelerate toward $116 per share by year-end ’25 and $130 per share by year-end ’26. The dividend is safe even in a recessionary environment.
Edition: 207
- 21 March, 2025
A secular bull market for Bank stocks
Financials
Looking back over the past half-century, Charles Peabody has never felt so invigorated about bank stocks. They are poised to generate fundamentals as good as the market, but trade at a substantial discount to the market. Many of the reasons for this discount are likely to abate in the coming years and investors will take note. He discusses the favourable outlook for bank revenues, asset quality, capital generation and regulatory relief. His top picks include Citigroup (a self-help story with a credible CEO trading at 2/3 of TBV) and Wells Fargo (labouring under an asset cap since 2018 that is destined to be lifted), as well as M&T Bank and Citizens.
Edition: 202
- 10 January, 2025
Sequencing a surge in capital markets & quantifying benefits of deregulation
Financials
Bank stocks are rerating higher in Q4 dramatically outperforming the broader market. The stocks have exceeded their traditional 55% relative P/E ceiling. In Charles Peabody's previous report, he quantified the benefits of tax cuts, robust capital markets, a steeper yield curve and more buybacks, which would result in an 11%-16% rise in bank earnings. This week, after conversations with policymakers, he believes a lighter regulatory touch could improve earnings a further 3% or more. Sequencing is important, as the Trump Administration is intent on taking a blowtorch to the government. There may be serious economic headwinds from attacking the fiscal deficit, followed by more rapid economic growth in the longer term.
Edition: 200
- 29 November, 2024
Financials
After earnings beats from JPMorgan, Wells Fargo, Goldman Sachs, Bank of America, PNC as well as Citi why were all the other banks up significantly and Citi was down 5%? Charles Peabody discusses asset caps (Citi is already shrinking itself by shedding its global consumer bank, so an asset cap makes no sense whatsoever) and a probable delay in the Banamex IPO. He argues Citi is one of the best stories in large cap financials and is the only company able to repurchase large amounts of its common stock at a substantial discount to TBV. Expectations are low, the regulatory pressure is high and management is doing all the right things.
Edition: 197
- 18 October, 2024
Financials
Charles Peabody discusses the 33% Q/Q jump in NII to $2.2bn, drawing attention to the $815m figure in the Global Banking & Markets unit (which could have added as much as $500m to revenues, or $1.15 a share to EPS) and questions the sustainability of the bank's financing revenues. The bottom line is that Charles believes that the stock is nothing more than a momentum play and will unwind quickly once the capital markets prove hostile. Contrary to management's commentary, its earnings stream is still very cyclical and not deserving of a premium valuation.
Edition: 191
- 26 July, 2024
G-SIB capital buffers under review
Financials
A regulatory attempt to massively increase capital requirements on the large banks, following amateurish behaviour by small banks that failed in 2023, has been delayed and watered down, given unprecedented opposition from banks / lawmakers. As a result, Charles Peabody anticipates a watering down and delay of Barr’s Holistic capital increases. In addition, he sees a possible reduction in G-SIB buffers which specifically benefits the large cap banks substantially (but not the regionals). While the main beneficiary is Citigroup, the bottom line of all this potential capital relief is that the major G-SIFI banks could emerge in 2025 with material excess capital. Thus, Charles expects a material step up in stock buyback programmes next year.
Edition: 190
- 12 July, 2024
Bank stocks up sharply in 1Q24 but earnings declining - hope springs eternal
Financials
Charles Peabody has been an ardent bank stock fan since a power shift last autumn but is getting queasy as some valuation thresholds are being reached. Last month, large cap banks sharply outperformed, rising 9.6% over 3x the SPX increase. Importantly, there was wide divergence around this number and there seems to be a mix shift favouring banks with balance sheet risk vs. non-bank financials. While earnings reflect declining revenues and rising credit costs, there is hope that these trends reverse in 2025. Unfortunately, Charles suspects that there will be little evidence to support this optimism when Q1 earnings commence. His strategic position is bullish as banks transition into a position of market leadership but tactically is bearish as near-term earnings come in weak.
Edition: 183
- 05 April, 2024
Bank Stocks: Controlling the narrative (except for credit quality)
Financials
Charles Peabody does not believe that the problems at NYCB will prove to be unique. He thinks the credit cycle has further to play out and that it will get a lot worse before it gets better. He expects regulators to find similar problems at other regional banks. It’s just that they may want to “pace” the discovery process so as not to create a systemic crisis. In the meantime, regional banks (a la Columbia Banking System) will be encouraged to build liquidity (at the expense of NIM) so that they might be able to absorb negative fundamental news (either within their own franchise or at a neighbouring bank). The current risk/reward for bottom fishing is simply not worth it.
Edition: 181
- 08 March, 2024
Banks are still attractive
Financials
Charles Peabody provides a comprehensive analysis of recent 4Q23 results and his revised outlook for 2024-25. No bank sharply exceeded expectations, but NII was generally better than anticipated, while credit trends were generally worse. The revenue outlook for 2024 is mixed with high hopes for capital markets revenues and expectations that NII will bottom by mid-year setting up for a robust 2025. Charles favours 1) Citi - epic valuation discount to TBV but is mistakenly ignored by many as a value trap. 2) Wells Fargo - saddled by excessive CRE exposure, but investors forget this company has survived every CRE cycle of our lifetimes. 3) JPMorgan - "over owned" but still benefiting from the First Republic deal.
Edition: 178
- 26 January, 2024
Financials
While many are trumpeting the fact that GS is returning to its roots, investors should remember what those roots were and why investors and (GS itself) wanted to transform this organisation into something different. Charles Peabody loves a turnaround story and has been alongside Bank of America in the past, Wells Fargo, and more recently Citigroup, emphasising that it generally takes 5 years to transform a company. GS is no different. He would exit the shares and favours Citi as a turnaround, WFC as a work in progress about to exit a regulatory yoke, BAC as a play on rates, and JPMorgan as a defensive fortress.
Edition: 175
- 08 December, 2023
Banks confront interest rates, regulators and credit entering earnings season
Financials
Bank stocks sold off on multi-decade highs in long term interest rates last week, while investors prepare for a host of key events over the coming months. Charles Peabody believes banks could rally on 3Q23 earnings results as investors see some relief from regulatory rulings and deposit betas while AOCI and credit deterioration remain front of mind. However, the fundamental trends for banks will continue to deteriorate into 1H24. Markets are differentiating between banks with the capital, liquidity and funding to take advantage of opportunities - and those without. Charles favours JPMorgan, Wells Fargo and PNC, while shunning US Bancorp and Truist Financial.
Edition: 171
- 13 October, 2023
Financials
USB is capital constrained and is hampered by an under-earning investment portfolio which will pressure earnings for years. Charles Peabody also questions management’s credibility - performance targets unveiled at Investor Days from 2013, 2016 and 2019 all went unmet. More recently, management has been disingenuous about its recent equity capital raise and deposit trends despite obvious balance sheet signs to the contrary. Statements about NII, stock buybacks, positive operating leverage and even the “3.8-year duration” on its AFS portfolio are all questionable. Charles downgrades the stock to Sell and expects the shares to revisit their 52-week lows.
Edition: 167
- 18 August, 2023
Banks announce capital plans after passing Fed stress test
Financials
Charles Peabody believes the banks conducted themselves well in fairly harsh stress tests that indicate an excess of capital in the sector. If regulators don’t panic, the path from crisis to normalisation can proceed even if we confront a mild recession. Charles favours the fundamental strength of JPMorgan but notes the underappreciated capital power of PNC and Wells Fargo. He is attracted to the adjusted yields of Citizens Financial and M&T while commenting that Morgan Stanley and Goldman Sachs also fare well in this category.
Edition: 164
- 07 July, 2023
Financials
It is well known that JPM got a good deal in its takeover of First Republic. Simply put, the bank acquired a market yielding asset with considerable funding benefits and significant cost cutting opportunities. While most analysts are plugging $500m ($0.17 a share) of added net income into their earnings models for the next 12 months, Charles Peabody is keen to highlight other dynamics of the deal that suggest that there are a lot more benefits to JPM of which many may be unaware.
Edition: 160
- 12 May, 2023
SVB failure triggers historic sell-off: A buying opportunity for Bank stocks
Financials
Charles Peabody provides a post-mortem on Silicon Valley Bank and points out that historically when banks perform so badly, they turn out to be good buys. Charles thinks rates have peaked on an interim basis, and bank earnings should be a calming influence. Revenues are strong and credit issues remain benign (albeit “normalising”). Most banks have sensible deposit beta assumptions, few are exposed to crypto, and few banks took on interest rate risk like SVB. As these fundamental facts become apparent during previews and actual results in April, bank stocks should snap back. Top Buys include JPMorgan, Citigroup, and Wells Fargo.
Edition: 156
- 17 March, 2023
Financials
Charles Peabody upgrades the stock to Buy - he believes the marketplace will begin to appreciate the integrity of Citi’s balance sheet as management executes on its goals. Charles is projecting a $75 price target based on an 8.5% RoTCE and a projected TBV of $88 by the end of 2023. He thinks that following the successful sale of most of its international consumer banking operations, including Banamex, Citi could resume stock buybacks in the $3-4bn range in 2H23. The stock trades at less than an 8 P/E, 62% of last year’s TBV and offers a 4% dividend.
Edition: 155
- 03 March, 2023
Bank stocks continue to roar in January, defying “the recession”
Financials
Charles Peabody recommends fading capital markets names as the outlook is based on hope but continues to be bullish banks (as he has done since the summer lows) as NII forecasts are restrained by fear. The most predicted recession in history is being pushed out and bank prices are responding to the powerful revenues and stable asset quality on display, buttressed by the resumption of stock buybacks. Charles continues to favour Wells Fargo, JPMorgan, PNC and Truist Financial Corp.
Edition: 152
- 20 January, 2023
Financials
“DJ Sol” remix uninspiring - Charles Peabody at a loss as to what the new strategic plan / organisation will do to improve the operation of the firm. This effort comes at a time when earnings are pressured, especially in the Investment Banking division, which is CEO Solomon’s heritage. The traditional conflict between ‘Trading’ and IB typically flares during bonus season, and, this year, GS faces the additional burden of the money losing Consumer Bank initiative. Recent media reports of certain cultural aspects at GS are no coincidence and reflect both dissatisfaction and possible tumult.
Edition: 149
- 25 November, 2022
Bank stocks roaring into leadership on micro & macro factors
Financials
Charles Peabody has been making the case that, if the financials outperformed the broader averages in the “down” market during Q3 (they did), they would emerge as a new leadership group in the next bull market. He continues to believe that such a transition is occurring. While the macro catalysts (Fed decelerating rate hikes (Jan 23); Treasury announcing a buyback (Feb); and end to China lockdowns (Mar)) are likely to bring in the generalist portfolio manager, the micro catalysts are already being recognised by financial specialists (+ive inflection in PPNR, share buybacks resuming, etc). Banks' outperformance to continue.
Edition: 148
- 11 November, 2022
Financials
Has been one of the best performing large cap bank stocks in recent years, but at current prices, the stock is not discounting potential capital constraints, a reduced buyback (Charles Peabody expects it to be cut in half), and near-term risks that include capital markets challenges and the Twitter ‘hung loan’. At 2x TBV the stock is more expensive than JPMorgan yet offers discounted returns. For dividend yield support there are other sources of high yields among other banks with less risk.
Edition: 146
- 14 October, 2022
Bank Stocks: PPNR is accelerating!
Pretax, pre-provision net revenues, the most powerful dynamic driving bank stocks, are projected to grow 7% in Q3’22, 15% in Q4’22, and 31% in Q1’23. These revenue and net income comparisons improve from near last in early 2022 to near best in 2023 for all S&P sectors. Obviously, top line revenue growth is almost assured given the shift in the yield curve, yet not so obvious is that credit quality appears quite stable through year end. When markets conclude that a recession is not inevitable, or that credit costs are manageable, Charles Peabody believes that bank stocks should respond quite favourably. Top picks include PNC, Wells Fargo, JPMorgan and Truist.
Edition: 143
- 02 September, 2022
US: Fed attains optionality, what’s next for banks?
With the widely anticipated Fed rate hike of 75 basis points last week, interest rates are near ‘neutral’ at 2.25%-2.50%. The Fed seemed satisfied that it was fighting inflation and markets seemed to think that a ‘pivot’ was in place, but Charles Peabody prefers to describe the current status as one of ‘optionality’. The Fed will likely continue to hike rates, but at a slower pace. And this optionality has removed some ‘fear of the Fed’ which helped July turn into a great month for all stocks. They see a choppy month for August as banks enjoy positive PPNR and markets gnash about recession.
Edition: 141
- 05 August, 2022
Financials
2Q22 results mask $1bn in additional earnings power as fortress balance sheet is strengthened - JPM reported $2.76 EPS but core earnings power was closer to Charles Peabody’s $3.00 estimate after backing out marks and other adjustments. While the market was disappointed by the suspension of stock buybacks, Charles’ analysis suggests JPM can raise the dividend and resume buybacks very soon while still building CET1 to 13% levels by 1Q23. The stock is very attractive at current levels.
Edition: 140
- 22 July, 2022
Financials
Likely to take several years before EPS starts to grow y/y as revenue potholes emerge in private equity and 10% growth in asset and wealth management proves challenging. While valuations are not dear, as liquidity is withdrawn and casualties litter the headlines such as Tiger Global, GS will suffer as well. Simply put, Charles Peabody sees $6-7bn of PE type revenues declining over the next few years and does not see more than $2.4bn in growth from asset management to replace it.
Edition: 137
- 10 June, 2022
Financials
Quality on sale - Charles Peabody sees positive operating leverage emerging, capital being rebuilt, and management earning its spurs as the culture of SunTrust blends with that of BB&T. As cost cuts meet the impact of higher interest rates, TFC will generate some very impressive returns with premium valuations to follow. Re. the wider banking sector, Charles has urged caution over the past half year having officially turned bearish last October. However, he has recently been selectively upgrading names with TFC joining JPMorgan and Wells Fargo as Buy recommendations.
Edition: 135
- 13 May, 2022
Financials
Volatility and price weakness mask solid fundamentals and good value - Charles Peabody projects operating expenses to be declining at a mid-single digit rate (Y/Y) by 4Q22, while revenues are growing at a low-to-mid single digit rate. Improvement in operating leverage should be more than enough to offset any normalisation in credit costs and still allow earnings growth to accelerate in the second half of the year. WFC will achieve >10% RoTCE for 2H22. Don’t rule out another double-digit dividend increase in 4Q22 and share buybacks to ramp up again. TP $60 by end of 2022.
Edition: 134
- 29 April, 2022
An ESG inversion in coal equity
Amidst the recent market freefall and chaos there is an anomaly… Coal India. The unloved, long-ignored stock has risen over 16% over a period when others have seen their value halved, leading Mark Latham to comment on an amusing ESG inversion in coal equity: Coal India is trading at 7x EPS, Adaro 6x EPS, Whitehaven 4x EPS and Peabody at 3x EPS. In other words, the more pronounced the ESG narrative, the lower the PE!
Edition: 131
- 18 March, 2022
Financials
Quality on sale - Charles Peabody sees 25-30% return over the next 12 months. He expects Q4’22 to be the transition quarter that ushers in a shift from negative to positive operating leverage and growth YoY in PPNR. 2023 EPS could come in closer to $13.50 a share (~$1 a share above Street expectations). This earnings power should support a 17% RoTCE. Charles expects TBV to grow toward $77 a share by year-end and $82 by year-end 2023. In addition, JPM has been unique in how it has managed its liquidity, not willing to extend duration; this will prove to be a competitive advantage in the current stress periods.
Edition: 131
- 18 March, 2022
Financials
Downgrades to Sell following 4Q21 results - Charles Peabody cuts his 2022 EPS estimate from $7.50 to $6.65, which implies an RoTCE of ~8.5%. Capital returns should prove constrained and uneven. The fourth quarter fundamental metrics were weak, the monetisation of Banamex will take time to accomplish and the much-anticipated March Investor Day is likely to show that any turnaround is going to be a slow, grind-it-out, multi-year process. In short, there’s no silver bullet that will get Citi back to a 12% RoTCE anytime soon, and those returns are still likely to prove to be subpar relative to its peer group. TP $55 by summer 2022.
Edition: 128
- 04 February, 2022