Ahead of the Curve | Friday, 23rd July 2021

US bank earnings come in strong – with further signs of accelerating loan growth.
With most large US bank earnings now behind us, the clear trend was EPS beats driven by remarkably good credit, with revenues better than expected (driven by fees) while costs were slightly higher than expected. All in, a solid but not thesis-changing quarter for the US banks and in most cases the stocks quickly reverted to tracking the 10-year Treasury as soon as the earnings were digested. Upon further review, however, we find it quite notable – and encouraging – to see an accelerating trajectory of loan growth almost across the board. The inflection seems to have occurred in the May/June timeframe as end-of-period loans are substantially higher than average loans (and hence did not help net interest income for the 2Q, but will going forward). Looking at the top 12 banks, loan growth moved from -2.3% in 1Q21 to +1.5% in 2Q21, and the 2Q numbers look even better when stripping out the government-backed PPP loans. This is a surprising and very positive development as loan growth has been the key missing ingredient for the bullish bank story with corporate and household customers holding so much excess liquidity. And furthermore in Europe, this week the ECB survey showed demand for both consumer and corporate loans surging in the second quarter. This is a positive leading indicator for loan growth, and a powerful mitigating factor for bank NII in the current rate environment.

Continuing to take advantage of volatility – adding to quality names in Europe.
The continued uncertainty over the rise in Delta variant cases and moves in interest rates has contributed to a volatile trading environment, in spite of the strong fundamental data we have been observing.  While the markets gyrate in the short-term, we have been taking advantage of this volatility to add to top-tier banks in Europe with strong franchises run by excellent management teams, significant excess capital positions and strong organic capital generation, and high prospective shareholder yields in the form of dividends and buybacks once the ECB lifts its ban.  Further, because of strong earnings upgrades the recent volatility has caused many of these names to de-rate back to recessionary levels, which is unjustified in light of the fact that the EU now has a higher vaccination rate than the US.  In addition the aforementioned increase in demand for loans in the ECB’s survey bodes well for H2 and further earnings upgrades.

UBS shines with stellar earnings report.
UBS kicked off the European bank earnings season with a bang, reporting a ROTE of 15.4% for the quarter with earnings 28% ahead of consensus with revenues 6% higher and loan loss writebacks.  In its private bank Net New Money grew at a 7% annualized rate, continuing the strong momentum of the first quarter, and investment banking revenues came in 12% ahead of consensus driven by a 35% beat in underwriting and advisory revenues.  And while the skeptics may respond that this strength is merely cyclical, the Street has responded by in many cases upgrading 2023 EPS by nearly double digits.  Further, the Swiss regulator has been less severe than the ECB in its stance on shareholder remuneration.  Including dividends and share buybacks, we see UBS on a 8-9% total shareholder yield in 2023.  This is simply a huge discount for such a strong franchise that is firing on all cylinders.  We believe fair value is closer to CHF 20/share, and have been adding to the name as we don’t expect this discount to last for long.

Flash news: ECB decides not to extend dividend recommendation beyond September 2021 (23rd July 2021, 6:45PM CEST)

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