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Fundamental View
AS OF 24 Jun 2024Goldman Sachs has had solid but mixed results in recent years, with strength in trading results particularly during periods of market volatility. Investment banking results have weakened in line with market conditions but Goldman’s market share remains strong. Investment banking appears to be rebounding in early 2024. The funding profile has improved over time with increased deposit funding.
Goldman remains well behind “Big 6” peers in diversifying its revenue base beyond its historical strong points. Wealth and Asset Management are now the most likely areas of growth in the coming years. Goldman’s results have been weighed by costs related to consumer banking and exits from those businesses.
Goldman Sachs’ (A2/BBB+/A) HoldCo long-term debt ratings have stable outlooks.
Business Description
AS OF 24 Jun 2024- Goldman Sachs is now the fifth largest bank holding company in the U.S. with approximately $1.69 tn in assets as of 1Q24 and a market capitalization of $158.9 bn as of May 16, 2024.
- Goldman Sachs presents its activities through three business segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
- Goldman's historical strengths include equity and FICC sales & trading, investment banking, institutional investment management including alternatives, and high net worth wealth management. It has been expanding its wealth management client base, and adding other stable fee income streams amid a sluggish capital market environment.
Risk & Catalysts
AS OF 24 Jun 2024From a fundamental standpoint, the past several years have been a mixed bag. Goldman’s foray into consumer lending was costly and ultimately did not work, diverting capital and management attention away from its core businesses and providing a meaningful drag on profitability. Management through most of the process of selling consumer-related businesses. Goldman’s performance has remained strong in its legacy areas of strength in trading and investment banking.
Goldman could participate in further M&A to achieve its long-term strategic goals, as it has in recent years with mixed results; most likely through add-on deals related to asset/wealth management.
Goldman could be impacted by the lack of liquidity in the secondary markets during periods of market turmoil, but for the most part, has been positively impacted by bouts of volatility.
Key Metrics
AS OF 24 Jun 2024$ mn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
ROAE (annual) | 10.3% | 21.3% | 9.7% | 7.3% | 8.1% |
ROAA (annual) | 0.8% | 1.5% | 0.7% | 0.5% | 0.6% |
PPNR / Avg. Assets | 1.34% | 1.86% | 1.08% | 3.29% | 0.83% |
Efficiency Ratio | 66% | 54% | 65% | 282% | 70% |
Net charge-offs (LTM) / Loans | 0.70% | 0.19% | 0.30% | 0.68% | 0.73% |
Common Dividend Payout | 19.0% | 10.6% | 28.4% | 158.9% | 38.8% |
CET1 Ratio | 14.1% | 13.6% | 15.0% | 14.4% | 14.6% |
Supplementary Leverage Ratio (SLR) | 6.9% | 5.5% | 5.8% | 5.5% | 5.4% |
Liquidity Coverage Ratio (LCR) | 128% | 122% | 129% | 128% | 128% |
CreditSights View
AS OF 18 Apr 2024We maintained our Market perform recommendation for Goldman Sachs; we remain quite comfortable with the name fundamentally but see better value at money center banks as well as Morgan Stanley, given recent spread levels, which we believe have been pulled tighter by a lack of HoldCo issuance by GS since the start of 2023. We see Goldman Sachs as an improving credit story despite messy results in 2023 as it exited a number of consumer-facing businesses, and 1Q24 results were stronger in core business lines within Global Banking & Markets and Asset & Wealth Management with less of a drag from Platform Solutions.
Recommendation Reviewed: April 18, 2024
Recommendation Changed: January 12, 2022
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Fundamental View
AS OF 24 Jun 2024We view Morgan Stanley’s credit profile positively, supported by high capital levels, diversification in revenues and continued progress on building out wealth/asset management both organically and through acquisition. Capital markets revenues have been impacted by challenging conditions particularly for investment banking, but profitability has remained solid, helped by the revenue shift to Wealth.
Morgan Stanley (A1/A-/A+) was upgraded by Moody’s to A1 on reduced risk of loss from the capital markets business in 2021. The S&P rating was upgraded to A- in May 2022.
Business Description
AS OF 24 Jun 2024- The company is now the sixth largest bank holding company by assets in the U.S. with $1.23 tn of assets as of 1Q24, and is the fourth largest by market capitalization ($162.8 bn as of May 16, 2024).
- Morgan Stanley maintains "significant market positions in each of its business segments," which include Institutional Securities, Wealth Management, and Investment Management.
Risk & Catalysts
AS OF 24 Jun 2024Ted Pick took over as CEO in 2024. The runner-up candidates for the job are staying with the company and Gorman is remaining as Executive Chairman, and we don’t expect major strategic changes.
Much of Morgan Stanley’s core business is tied to global macroeconomic trends and investor risk appetite. Additionally, it has significant trading risk and counterparty exposures, though such risk appears well-managed overall and is reflected in capital requirements.
Capital levels are governed by the annual DFAST process and the SCB regime. MS has typically run with capital levels at or near the highest among GSIBs given the trading losses included in the Fed’s model.
Key Metrics
AS OF 24 Jun 2024$ mn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
ROAE (annual) | 12.4% | 14.3% | 10.8% | 9.1% | 9.5% |
ROAA (annual) | 1.0% | 1.3% | 0.9% | 0.8% | 0.8% |
PPNR / Avg. Assets | 1.40% | 1.64% | 1.22% | 4.41% | 1.05% |
Efficiency Ratio | 69% | 66% | 72% | 298% | 76% |
Net charge-offs (LTM) / Loans | 0.05% | 0.05% | 0.01% | 0.06% | 0.04% |
Common Dividend Payout | 20.9% | 25.4% | 46.3% | 215.5% | 57.5% |
CET1 Ratio | 17.4% | 16.1% | 15.3% | 15.2% | 15.0% |
Supplementary Leverage Ratio (SLR) | 7.4% | 5.6% | 5.5% | 5.5% | 5.4% |
Liquidity Coverage Ratio (LCR) | 129% | 134% | 132% | 129% | 129% |
CreditSights View
AS OF 17 Apr 2024We maintain our Market perform recommendation for Morgan Stanley, with our positive view of fundamentals supported by 1Q24 results. We see better valuation among some of the money center banks (particularly Citi and BAC) but like MS relative to GS given similar spread levels recently. Performance rebounded in the Wealth segment and investment banking fees have started to show signs of a turnaround recently, both supported by market conditions in combination with the company’s long-term investments.
Recommendation Reviewed: April 17, 2024
Recommendation Changed: March 14, 2016
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Fundamental View
AS OF 04 Jun 2024JPMorgan is one of the strongest and best positioned banks to navigate the current environment, with a well-diversified business model and good competitive positioning across a variety of lending and capital markets areas.
The company continues to deploy its considerable earnings power into reinvestment, specifically around technology where we are bullish on its ability to drive competitive advantages through strategic enhancements and efficiency gains.
Business Description
AS OF 04 Jun 2024- JPMorgan ranks as the largest U.S. bank by total assets ($4.09 tn at 1Q24) and deposits ($2.43 tn at 1Q24).
- JPMorgan ranks 1st in terms of U.S. deposits with approximately $2.07 tn in deposits at YE23 across 4,918 branches (S&P Capital IQ). JPMorgan's footprint includes New York (#1), Texas (#1), California (#2), Illinois (#1), Michigan (#1), Arizona (#1), Ohio (#5), and Florida (#4), among others.
- JPMorgan's major business lines include investment banking, retail banking, card services, treasury & securities services, commercial banking, and asset & wealth management.
Risk & Catalysts
AS OF 04 Jun 2024Succession planning at JPMorgan has a higher profile than many peers, with CEO Dimon (66 year-old) having held the top spot for over 15 years. Another recent round of shuffling top management did not yield much clarity, with presumed frontrunners Marianne Lake becoming sole CEO of the Consumer Bank and Jennifer Piepszak moving over to co-CEO of the new Commercial & Investment Bank segment, alongside Troy Rohrbaugh who has been running Markets & Securities Services.
The sector remains exposed to reputational, legislative/administrative risk, and cyber threats, although the significant tech spend over the past few years should (theoretically) result in a stronger position for JPM to manage the security threats.
Although not likely a credit risk, JPMorgan may continue to be acquisitive around non-bank financial and ancillary services; but we would expect any deal to be conservatively funded and looking to further technology and fee income strategies (e.g. payments or asset management).
Key Metrics
AS OF 04 Jun 2024$ mn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
ROAE (annual) | 10.9% | 17.0% | 13.2% | 16.0% | 15.9% |
ROAA (annual) | 0.9% | 1.3% | 1.0% | 1.3% | 1.3% |
PPNR / Avg. Assets | 1.52% | 1.32% | 1.39% | 7.06% | 1.82% |
Efficiency Ratio | 57% | 59% | 58% | 214% | 55% |
Net Interest Margin (Annual) | 1.98% | 1.63% | 2.00% | 2.70% | 2.72% |
Net charge-offs (LTM) / Loans | 0.52% | 0.26% | 0.25% | 0.48% | 0.53% |
Common Dividend Payout | 38% | 24% | 32% | 101% | 25% |
CET1 Ratio | 13.1% | 13.1% | 13.2% | 15.0% | 15.0% |
Supplementary Leverage Ratio (SLR) | 6.9% | 5.4% | 5.6% | 6.1% | 6.1% |
Liquidity Coverage Ratio (LCR) | 110% | 110% | 110% | 112% | 112% |
CreditSights View
AS OF 15 Apr 2024We moved back down to a Market perform on JPM following the SVB debacle and subsequent selloff; JPM was (rightfully) viewed as a flight-to-quality name amid the volatility, but continues to trade that way with spreads anchored ~10 bp tighter to money center peers even after the rally. Supply could be a modest relative value technical headwind with banks returning to the market to re-up regulatory needs; JPM is generally more exposed on the new issuance front to LTD/TLAC needs from the regulatory changes. Value against broader corporates is still attractive however, supporting the overall M/P view, and there remain no real concerns with the core credit: the strength and resiliency of the diverse franchises has been on full display the past several years.
Recommendation Reviewed: April 15, 2024
Recommendation Changed: April 17, 2023
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Fundamental View
AS OF 23 May 2024SBUX operates and licenses Starbucks care locations. Management targets lease-adjusted leverage of under 3x and has expressed support for the current high-BBB ratings profile.
Recent results showed headwinds from lower traffic across the company’s locations in the U.S. amid weaker consumer spending. SBUX also reported weak results in its second-largest market, China, due to increased competition in the market.
Management slashed its F2024 outlook. We still see a path for SBUX to maintain stable leverage metrics over the medium-term, but prefer playing the restaurant space via McDonald’s where we see stronger buffers against weaker restaurant traffic.
Business Description
AS OF 23 May 2024- SBUX is a leading coffee roaster and retailer. The company operates and licenses over 38,000 Starbucks locations worldwide where it sells premium coffee beverages as well as other specialty drinks and prepared foods. Slightly over half the locations are company operated (52%) and the rest are licensed to third party operators.
- In F2023, SBUX generated $36.0 bn in revenue and $7.3 bn in adjusted EBITDA. SBUX has three reporting segments: N. America (74% of F2023 revenue), which covers cafes in the U.S. and Canada; International (21%), which includes China, Japan, Latin America, and EMEA; and Channel Development (5.9%) which includes revenue from other branded products sold outside retail locations.
- SBUX is prioritizing International development, particularly within China. Currently, 43% of the total cafes are in the U.S., but the company is guiding to an ambitious unit expansion strategy that emphasizes unit growth across China. Long-term, SBUX is targeting 55,000 cafes globally by 2030.
Risk & Catalysts
AS OF 23 May 2024SBUX has more direct exposure to labor challenges than wholly franchised peers due to its concentration of company operated cafes. Despite significant wage investments, SBUX has had to contend with an unionization campaign across a portion of its U.S. cafes. However, union growth has slowed and management noted improved employee retention following the latest wage increases.
Lower discretionary spending in the U.S. could weigh on SBUX’s sales growth. Recent results showed lower traffic on a YoY basis due primarily to fewer visits from occassional or non-rewards memebers. SBUX U.S. business has also faced localized boycotts related to its labor disputes and its conduct of business in the Middle East.
SBUX’s China locations accounted for 10+% of operating income pre-pandemic and management considered it the strongest growth region. However, increased competition and weak spending data have impacted cafes across the region in recent periods.
Key Metrics
AS OF 23 May 2024$ mn | Y20 | Y21 | Y22 | Y23 | LTM 2Q24 |
---|---|---|---|---|---|
Revenue | 23,518 | 29,061 | 32,250 | 35,976 | 36,530 |
EBITDA | 3,636 | 6,775 | 6,385 | 7,252 | 7,406 |
EBITDA Margin | 15.5% | 23.3% | 19.8% | 20.2% | 20.3% |
EBITDA-Capex to Revenue | 9.1% | 18.3% | 14.1% | 13.7% | 13.2% |
Total Debt | 16,348 | 14,616 | 15,044 | 15,400 | 15,590 |
Net Debt | 11,997 | 8,160 | 12,226 | 11,848 | 12,826 |
Net Leverage | 3.3x | 1.2x | 1.9x | 1.6x | 1.7x |
Lease Adjusted Debt to EBITDAR | 5.0x | 2.9x | 3.1x | 2.8x | 2.8x |
EV / EBITDA | 31.0x | 20.4x | 17.1x | 16.1x | 15.7x |
CreditSights View
AS OF 21 May 2024We are downgrading our recommendation on Starbucks from Market perform to Underperform following a weak F2Q24 result with a massive reset in F2024 guidance. While we had anticipated a slowdown in comparable sales growth amid a tougher consumer environment, the F2Q results were worse than anticipated and we think it is prudent to taper exposure until the company shows signs of stabilization in traffic trends. We maintain a preference for McDonald’s, SBUX’s high-BBB rated peer in the quick service restaurant space. While MCD is also navigating an environment with lower foodservice traffic, we like its menu of value-oriented food and beverage offerings relative to SBUX. We also expect overhang at SBUX from its sizable China exposure, and note increased levels of competition in the market.
Recommendation Reviewed: May 21, 2024
Recommendation Changed: May 01, 2024
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Fundamental View
AS OF 21 Mar 2024WFC is a leading domestic bank with strong positioning across consumer and commercial lending asset classes and a top 3 deposit market share in the U.S.
The core credit risk profile remains solid; the company has actively shed non-core assets and business lines (including WFAM), both as a means of managing under the Fed’s asset cap and part of new-ish CEO Scharf’s streamline strategy.
The balance sheet is strong, but WFC continues to suffer from internal deficiencies across a range of compliance and risk mgmt. functions unearthed after the fake account scandal. Positively, the Fed reportedly approved WFC’s overhaul plans, a crucial step in the remediation process; WFC also continues to close outstanding consent orders, though some remain outstanding.
Business Description
AS OF 21 Mar 2024- Wells Fargo ranks as the U.S.'s 4th largest bank by total assets ($1.93 tn at 4Q23) and 3rd largest by total deposits ($1.36 tn).
- Wells Fargo ranks 3rd in terms of U.S. deposits with approximately $1.37 tn in deposits at YE23 and 4,359 branches across the U.S. (S&P Capital IQ). The company has leading market shares across its geographically diverse footprint, including in California (#3), South Dakota (#2), Florida (#2), Texas (#3), Minnesota (#2), and Georgia (#3).
- Wells Fargo's major business lines include U.S. retail banking, mortgage banking, consumer finance, corporate and middle market banking, and wealth management.
Risk & Catalysts
AS OF 21 Mar 2024The asset cap and associated regulatory remediation remains a millstone with a wholly unknown timeframe even after years of efforts. There is some risk that Wells could bleed share and franchise value in an economic recovery if loan demand rebounds and the company cannot fully capture the business opportunity due to the asset cap, though so far that has not been the case.
Wells Fargo faces reputational risk tied to those misconduct and business practices scandals, though likely fading with time and remediation progress; at 4Q23, WFC high-end estimable loss above legal accruals was $1.7 bn.
Wells has less fee income diversification as peers, largely due to the much smaller scale of the capital markets businesses and smaller presence in credit cards though the latter is a point of emphasis under Scharf as Wells embarked on aggressive product refreshes.
Key Metrics
AS OF 21 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | 4Q23 |
---|---|---|---|---|---|
ROAE (annual) | 9.9% | 1.8% | 11.4% | 7.3% | 10.5% |
ROAA (annual) | 1.01% | 0.17% | 1.11% | 0.70% | 1.00% |
PPNR / Avg. Assets | 1.39% | 0.72% | 1.26% | 0.91% | 1.42% |
Efficiency Ratio | 70% | 81% | 70% | 78% | 67% |
Net Interest Margin (Annual) | 2.72% | 2.27% | 2.05% | 2.63% | 3.05% |
Net charge-offs (LTM) / Loans | 0.29% | 0.34% | 0.18% | 0.17% | 0.37% |
Common Dividend Payout | 43% | 152% | 11% | 32% | 25% |
CET1 Ratio | 11.1% | 11.6% | 11.4% | 10.6% | 11.4% |
Supplementary Leverage Ratio (SLR) | 7.1% | 8.1% | 6.9% | 6.9% | 7.1% |
Liquidity Coverage Ratio (LCR) | 120% | 133% | 118% | 122% | 125% |
CreditSights View
AS OF 15 Apr 2024We are comfortable with Wells Fargo as a credit; our Market perform view is underpinned by strong credit quality and cheap spreads against broader corporates, and we have an increasingly positive bias on the name especially as the technical supply risk overhang abates with the Basel III endgame looking delayed and watered down. The company remains under the 6-year running asset cap, but we don’t think resolution is necessarily a catalyst; market readthrough may well be for increased issuance to support balance sheet growth after years of the cap, though fundamentally we think Wells would have a very strong claim to the best-in-class risk management and compliance structure among peers.
Recommendation Reviewed: April 15, 2024
Recommendation Changed: April 15, 2022
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Fundamental View
AS OF 11 Mar 2024Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group’s leading position will be bolstered in 2023/24 as legacy media companies rein in spending and international ambitions.
From a financial perspective, we expect Netflix will deliver double-digit EBITDA growth in 2023/24 driven by a re-acceleration in subscriber growth.
Netflix’s financial policy is relatively conservative. $5+ bn of FCF and target gross debt of $10-15 billion equates to strong IG metrics.
Business Description
AS OF 11 Mar 2024- NFLX is the world's leading subscription streaming entertainment service with ~260 mn paid streaming subs in 190+ countries around the world. NFLX's programming includes original & acquired TV series, documentaries and feature films.
- NFLX began expanding internationally with the launch of services in Canada (Sep 2010), followed by LatAm (Sep 2011), and the UK and Ireland (Jan 2012). NFLX launched services in 17 more markets at a measured pace through the end of 2015 before launching in the rest of the world in Jan 2016 (ex-China, N Korea, Syria, Crimea).
- At the end of 4Q23, Netflix's regional subscriber breakdown was as follows: (1) EMEA - 88.8 mn; (2) UCAN - 80.1 mn; (3) LATAM - 46.0 mn and (4) APAC - 45.3 mn.
- Ted Sarandos and Greg Peters are Co-CEOs, with Mr. Sarandos appointed to the position in July 2020 and Mr. Peters in January 2023. Co-founder Reed Hastings was appointed as executive chairman of the Board in January 2023.
Risk & Catalysts
AS OF 11 Mar 2024Market Saturation: Netflix is highly penetrated in the US market, so future growth will become increasingly dependent on price increases, uptake of the ad tier and success on the password sharing crackdown. The recent WWE deal also opens the door to higher-priced sports programming.
Increased Competition: Several large competitors including Amazon and Apple are increasingly leaning into DTC video offerings on a global basis. Heightened competition may result in rising churn & declining gross additions for NFLX.
M&A Risk: Netflix is in the early stages of an expansion into video games and has already acquired several studios.
Key Metrics
AS OF 11 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Revenue | 20,156 | 24,996 | 29,698 | 31,616 | 33,723 |
Revenue YoY % | 27.6% | 24.0% | 18.8% | 6.5% | 6.7% |
EBITDA | 3,113 | 5,116 | 6,806 | 6,695 | 7,650 |
EBITDA Growth | 55% | 64% | 33% | (2%) | 14% |
Cash Content Expense | 14,611 | 12,537 | 17,469 | 16,660 | 13,140 |
CFO - CapEx | (3,140) | 1,929 | (132) | 1,619 | 6,926 |
Dividends/CFO-Capex | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
LTM CFO-CapEx to Debt | (21.3%) | 11.8% | (0.9%) | 11.3% | 47.6% |
CreditSights View
AS OF 19 Apr 2024Netflix’s USD bonds trade like BBB+ paper, but we believe the premium valuation is justified given the group’s leading scale, operating momentum (forecast ~20+ million net adds and ~30+% EBITDA growth in FY24) and credit metrics, which stand in stark contrast to the pressures facing legacy media peers. Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group is on track to extend its leading position as legacy media companies rein in spending and international ambitions and revert to licensing library content to competitors. The company’s gross leverage is already best in class at ~1.5x, and we expect Netflix can generate ~$7 billion of FCF in FY24 with a FCF to debt ratio in the ~50% area.
Recommendation Reviewed: April 19, 2024
Recommendation Changed: October 20, 2022
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Fundamental View
AS OF 15 Feb 2024We expect T-Mobile will maintain its position as the industry leader in postpaid phone net additions, service revenue, EBITDA and FCF growth in 2024. We think the company has significant subscriber runway remaining in the suburban/rural and enterprise markets.
Adjusted net leverage (2.6x at 4Q23) is nearly half a turn lower than AT&T and Verizon. Relatively strong EBITDA growth and a modest dividend commitment results in greater financial flexibility than peers.
T-Mobile benefits from the strongest spectrum position in the industry, including an average of 181 MHz in the 2.5 GHz band, which results in better 5G network coverage than AT&T and Verizon.
Business Description
AS OF 15 Feb 2024- TMUS is the one of the top 3 U.S. wireless carriers and is owned ~50% by Deutsche Telekom (DT). On April 1, 2020, TMUS and S completed an all-stock merger, valuing S at an EV of approximately $59.7 bn.
- TMUS ended 4Q23 with ~120 mn customers, including 98 mn postpaid and 22 mn prepaid.
- TMUS reaches 330+mn POPs with its Extended Range 5G network (using the 600 MHz spectrum) and reaches 300mn customers with its Ultra Capacity 5G.
Risk & Catalysts
AS OF 15 Feb 2024Converged wireless/broadband offers from cable operators and an upstart competitor in the form of DISH raises the risk of pricing pressure in the mature consumer wireless market.
With T-Mobile’s credit rating now comfortably in the mid-BBB area and leverage in the vicinity of the group’s mid-2x target area, we expect the company’s capital allocation to shift toward share buybacks.
The company has expressed an interest in fiber assets. At present, T-Mobile is focused on an “asset-lite” fiber strategy, but there is some concern the group could eventually deploy more capital to this area (potentially via M&A).
Key Metrics
AS OF 15 Feb 2024Baa2/BBB/BBB+ | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Revenue | 45,151 | 68,397 | 80,118 | 79,571 | 78,558 |
Organic Revenue Growth | 4.3% | 5.8% | 7.3% | (0.7%) | (1.3%) |
EBITDA | 13,536 | 24,557 | 26,924 | 27,821 | 29,428 |
Adj. EBITDA Growth | 9.8% | 4.3% | (64.0%) | 33.9% | 5.8% |
Adj. EBITDA Margin | 30.0% | 35.9% | 33.6% | 35.0% | 37.5% |
CapEx % of Sales | 13.1% | 16.1% | 15.4% | 17.6% | 12.5% |
Total Debt | 29,508 | 76,660 | 79,574 | 78,425 | 78,425 |
Net Debt | 27,980 | 66,275 | 72,943 | 73,918 | 73,290 |
Gross Leverage | 2.2x | 3.5x | 3.4x | 3.0x | 2.7x |
Net Leverage | 2.1x | 3.0x | 3.1x | 2.8x | 2.5x |
Interest Coverage | 11.9x | 9.0x | 7.2x | 8.0x | 8.3x |
FCF as % of Debt | 22.0% | 14.1% | 13.7% | 13.2% | 19.2% |
CreditSights View
AS OF 28 May 2024We expect TMUS will once again lead the Big 3 in major KPIs in 2024, including high-single digit EBITDA growth and low-double digit FCF growth. We view earnings/growth visibility as higher than peers, with the outlook supported by its leading 5G mid-band coverage (over 300 million PoPs with ~200 MHz) and historical under-penetration in rural and enterprise markets. Credit metrics are best in class, with the group already at its ~2.5x net leverage target while AT&T (2.9x) and Verizon (3.0x) are still in deleveraging mode. While the industry is very focused on net leverage, TMUS stands out in terms of FCF generation and the lack of a substantial dividend obligation. To put it simply, TMUS has a cleaner growth story as a challenger and a great track record on execution.
Recommendation Reviewed: May 28, 2024
Recommendation Changed: March 18, 2021
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Fundamental View
AS OF 27 Nov 2023- Citigroup is a solid global money center bank that has done a decent job cleaning up legacy issues and fortifying the risk profile in the wake of the GFC, though it still lags peers on several fronts including profitability.
- Citi has more geographic diversification than peers owing to its international presences, though the retail side is shrinking considerably as Citi exits most of Asia and Mexico, refocusing around a global wealth management/private bank strategy.
- Citi lags on the domestic deposit front, with less than half of the deposit base of money center peers and a much smaller physical footprint, though it has been focused on driving deposit flows the past couple of years.
Business Description
AS OF 27 Nov 2023- Citigroup ranks as the 3rd largest U.S. bank by total assets ($2.37 tn) at 3Q23 and 3rd largest by Total Equity ($210 bn).
- Citi is 4th in terms of U.S. deposits with approximately $757 bn as of 3Q23 across 665 branches (S&P Capital IQ). Given the significantly smaller branch footprint, Citi does not generally possess leading market shares in most states besides South Dakota (#1).
- Citi's major business lines include U.S. consumer (mortgages and credit cards) and retail banking, global consumer, global corporate & investment banking, and global payments. The company is in the process of exiting 13 international consumer markets, refocusing the non-US footprint around four regional hubs and combining wealth management and the private bank to drive synergies out of the hubs.
Risk & Catalysts
AS OF 27 Nov 2023- Citi is still lagging peers on profitability (both ROA and ROTCE); new CEO Fraser seems to have adopted the profitability gap as a key focus point as well, and we see Fraser’s strategic moves (e.g. int’l consumer exits) as aimed at capital optimization to improve ROE.
- While not as severe as a Wells-type situation, Citi’s regulatory mishaps introduces risks should the bank fail to show improvement in internal controls, or if another major risk management failure crops up. Our base case: Citi will be able to satisfy regulators and end up with improved infrastructure, though it will likely be a multi-year process with resultant upward cost pressures.
- Citi’s global footprint makes it more exposed to emerging markets and non-domestic economies, though pending exits of ‘riskier’ consumer loan books in Asia and Mexico should help the EM risk profile; Citi has also demonstrated an ability to unwind other riskier exposures (e.g. Russia).
Key Metrics
AS OF 27 Nov 2023$ mn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
---|---|---|---|---|---|
ROAE (annual) | 9.9% | 5.7% | 10.9% | 7.5% | 6.6% |
ROAA (annual) | 0.97% | 0.48% | 0.92% | 0.61% | 0.56% |
PPNR / Avg. Assets | 1.61% | 1.28% | 1.02% | 0.97% | 4.05% |
Efficiency Ratio | 58% | 61% | 68% | 67% | 267% |
Net Interest Margin (Annual) | 2.59% | 2.14% | 1.94% | 2.20% | 2.36% |
Net charge-offs (LTM) / Loans | 1.12% | 1.08% | 0.70% | 0.55% | 0.83% |
Common Dividend Payout | 23% | 39% | 19% | 27% | 113% |
CET1 Ratio | 11.8% | 11.5% | 12.3% | 13.0% | 13.6% |
Supplementary Leverage Ratio (SLR) | 6.2% | 7.0% | 5.7% | 5.8% | 6.0% |
Liquidity Coverage Ratio (LCR) | 115% | 118% | 115% | 118% | 117% |
CreditSights View
AS OF 16 Jan 2024We are comfortable with Citi and like it for the spread value over mid-A banks and compelling carry against IG corporates. We see technical support over the next 2-3 years as Citi exits int’l consumer and reduces RWAs, in turn lowering regulatory debt needs; Banamex retail is the big remaining piece, but a 2025 event at the earliest. Citi’s lagging profitability to peers is a real differentiator, but we are constructive on CEO Fraser’s overhaul and expect (and need) to see more momentum in 2024. Citi showed no ill effects from the SVB collapse, and the largely non-US commercial deposit base is inextricably tied into the bank’s broader product/service offerings with extensive and long-dated customer relationships exemplified by stable (if more costly) deposit bases and solid NIM expansion.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: January 12, 2017
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Fundamental View
AS OF 27 Nov 2023- Bank of America is a strong and steady credit, having dramatically improved its risk profile over the last decade and significantly closed the gap with industry bellwether(s); effective expense management has also been a demonstrated core competency.
- The company remains well diversified across business lines in lending, markets, and asset/wealth management and has shown little appetite for excessive risk-taking, exemplified in part by strong stress test performance versus peers.
Business Description
AS OF 27 Nov 2023- Bank of America ranks as the 2nd largest U.S. bank by total assets ($3.15 tn) and by total deposits ($1.88 tn) as of 3Q23.
- Bank of America ranked 2nd in terms of U.S. deposits at YE22 with approximately $1.88 tn in deposits and 3,796 branches (S&P Capital IQ) with a coast-to-coast branch presence including leading market shares in California (#1), North Carolina (#1), Texas (#2), Florida (#1), and New York (#3).
- Bank of America's major business lines include U.S. retail banking, credit cards, global corporate & investment banking, and global wealth & investment management.
Risk & Catalysts
AS OF 27 Nov 2023- Bank of America has made excellent progress generating operating efficiencies and improving profitability as the crisis-era overhangs fade further into the background; it still lags peer JPM on some measures, including capital markets, but is well positioned to capture any rebounding loan growth.
- The company is relatively more sensitive to interest rates than peers, estimating that a +100 bp parallel shift in the interest rate yield curve would increase net interest income by $3.1 bn over the next 12 months (as of 3Q23).
- Also a sector-wide concern, Bank of America is exposed to cyber threats, although it has been deploying significant resources into tech spend the past few years.
Key Metrics
AS OF 27 Nov 2023$ mn | FY19 | FY20 | FY21 | FY22 | 3Q23 |
---|---|---|---|---|---|
ROAE (annual) | 10.2% | 6.7% | 11.7% | 10.2% | 10.9% |
ROAA (annual) | 1.1% | 0.6% | 1.0% | 0.9% | 1.0% |
PPNR / Avg. Assets | 1.48% | 1.06% | 0.94% | 1.02% | 1.20% |
Efficiency Ratio | 60% | 66% | 67% | 65% | 63% |
Net Interest Margin (Annual) | 2.43% | 1.90% | 1.66% | 1.83% | 2.14% |
Net charge-offs (LTM) / Loans | 0.37% | 0.40% | 0.23% | 0.18% | 0.30% |
Common Dividend Payout | 22% | 35% | 21% | 25% | 24% |
CET1 Ratio | 11.2% | 11.9% | 10.6% | 11.2% | 11.9% |
Supplementary Leverage Ratio (SLR) | 6.4% | 7.2% | 5.5% | 5.9% | 6.2% |
Liquidity Coverage Ratio (LCR) | 118% | 116% | 122% | 115% | 116% |
CreditSights View
AS OF 16 Jan 2024Our Outperform recommendation on BAC is based on a combination of fundamental strength (consistent peer-leading stress test loss rates), spread pickup over high-quality peer banks, and attractive valuations against broader corporates. Technical support is not as strong as we see all the banks returning to more normalized issuance in 2024; positively, we think BAC is less exposed than money center peers to net new issue needs from Basel III endgame implementation. The company’s missteps on the HTM portfolio is an earnings and margin opportunity cost issue, not a fundamental one, and justified ex post by the large and stable retail deposit base demonstrated through the post-SVB failure fallout; and profitability is still healthy with solidly mid-teens ROTCE, despite the securities drag.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: November 04, 2013
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Fundamental View
AS OF 11 Aug 2023- We continue to have confidence in CEO Andy Jassy and the company’s long-term business for both AWS and consumer. The 2Q23 results support our view as AWS growth is stabilizing and the North America consumer segment significantly improved its GAAP operating profit. AWS customers are shifting from workload optimizations to new workload deployments, and we expect AWS to remain a profitable growth driver for the foreseeable future.
- We anticipate the North America segment to see continued profitability improvements driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. Gross leverage declined by nearly 2 ticks to 0.8x or 1.6x on a lease-adjusted basis. Also, Amazon’s equity cushion is ~$1.4 tn.
Business Description
AS OF 11 Aug 2023- Amazon is an e-commerce company which sells a wide range of its own products and those of 3rd party sellers. Amazon offers fulfillment services for 3rd party sellers (FBA) and sells cloud computing services (AWS). In 2Q23, 3rd party units were 60% of total paid units, and FBA units are a majority of 3rd party units.
- In LTM 2Q23, NA segment was 62% of sales, International was 22% of sales, and AWS was 16% of sales.
- Amazon disclosed it surpassed 200 mn Prime members in April 2021. The annual membership was increased in February 2022 from $119 to $139 in the US, although fees vary by country. In mid-2019, Amazon Prime began to transition from 2-day to 1-day shipping. Amazon Prime also offers Prime Video, streaming music, and other benefits.
- In 2006, Amazon launched AWS which remains the leader in cloud computing (IaaS/PaaS). Amazon sells its own devices (e-reader, smart speaker, streaming media player, etc.).
Risk & Catalysts
AS OF 11 Aug 2023- We think Amazon has moderate event risk as its large size (~$1.4 tn market cap) provides a buffer against the regulatory risks.
- Amazon has taken steps to improve profitability including multiple rounds of layoffs which could preempt activist investor campaigns that have become more common lately for Big Tech including GOOGL and META.
- Amazon continues to face regulatory scrutiny. The FTC is finalizing a lawsuit alleging AMZN disadvantages third-party merchants who do not use its services. The biggest risk would be a breakup, although we view that as unlikely.
- Amazon’s $14 bn acquisition of Whole Foods has shown its proclivity for large M&A, although the regulatory environment could make large deals challenging e.g., FTC scrutiny on its $8.5 bn MGM acquisition.
- Amazon repurchased $6.0 bn shares in 1H22, which were the first buybacks in 10 years, although the company has not repurchased any shares since then.
Key Metrics
AS OF 11 Aug 2023$ mn | 2019 | 2020 | 2021 | 2022 | LTM 2Q23 |
---|---|---|---|---|---|
Revenue YoY % | 20.5% | 37.6% | 21.7% | 9.4% | 10.7% |
EBITDA | 43,394 | 57,284 | 71,994 | 74,593 | 87,648 |
EBITDA Margin | 15.5% | 14.8% | 15.3% | 14.5% | 16.3% |
CapEx % of Sales | 4.5% | 9.1% | 11.8% | 11.3% | 10.0% |
Sh. Ret. % of CFO-CapEx | 0% | 0% | 0% | (52%) | 0% |
Net Debt | (30,201) | (50,497) | (44,771) | 7,316 | 7,902 |
Gross Leverage | 0.6x | 0.6x | 0.7x | 1.0x | 0.8x |
EV / EBITDA | 20.8x | 28.3x | 23.3x | 11.7x | 15.6x |
CreditSights View
AS OF 21 Dec 2023We continue to have confidence in CEO Andy Jassy and the long-term business for both AWS and consumer. The 3Q23 results support our view as AWS growth has stabilized, AWS and North America both had record profits, and International nearly reached breakeven profitability. We expect AWS to remain a profitable growth driver for the foreseeable future, and the North America segment to see improved profitability driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. We estimate gross leverage declined sharply to 0.6x or 1.4x on a lease-adjusted basis. We think Amazon should be able to address the FTC’s concerns with behavioral remedies and fines, and we view a breakup as unlikely.
Recommendation Reviewed: December 21, 2023
Recommendation Changed: December 21, 2023
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