'Choppy Year' Expected for Wirehouses, Other BDs in 2020

The large financial companies that own the wirehouse broker-dealers — Bank of America, Morgan Stanley, UBS and Wells Fargo — and other Wall Street giants, like JPMorgan and Bank of New York Mellon, could see "a choppy year" for their fundamentals in 2020, according to a report by Keefe, Bruyette & Woods.

Overall, the KBW team sees earnings growth of 6.9% next year, "driven mostly by share repurchase." But it also sees some economic risks on the horizon, muted loan growth and lower interest rates — which should pressure net interest income growth.

Still, the group expects the large firms "to eke out modest revenue growth, on average." The next 12 months, though, are seen as "a transitional year as we wait for new catalysts to emerge longer term," say Brian Kleinhanzl; Michael C. Brown, CFA; and Matthew Gruseke.

Bank of America, which owns Merrill Lynch, should see higher earnings in 2020 thanks to its net interest income results, but they will be partially offset by higher expenses, according to KBW. This should also be the case for JPMorgan next year.

Morgan Stanley is predicted to see higher earnings on net interest income, as is Wells Fargo next year. Wells, though, might see its results hurt by weaker non-interest income.

Wealth Management

Looking specifically at Morgan Stanley's wealth management revenues, the KBW analysts see the unit growing sales about 1.5% in 2019 to $17.48 billion and expanding 2.5% in 2020 to $17.91 billion.

The wealth unit's pretax profit margin could hit 27.7% in 2019, up from 26.2% in 2018. In 2020, the analysts predict it will stay at 27.7%.

Bank of New York Mellon's asset and wealth management fees should stay roughly flat over the next 12 months at roughly $3.33 billion, they say.

Meanwhile, LPL Financial's total revenue is anticipated to jump 6.5% in 2020 to nearly $6 billion, according to consensus estimates.

Rival Raymond James could see its overall sales expand 5% in the fiscal year ending Sept. 30, 2020, to $8.14 billion and rise 4% in the next fiscal year (ending Sept. 30, 2021) at $8.48 billion, analysts say.

Other Issues

While large banks saw their stocks outperform in 2019, 2020 could bring "low inflation, modest economic growth, and a relatively flat yield curve," KBW's team says, limiting further strengthening.

With the elections coming, market volatility should creep up, which "can be good for markets activity but the offset should be more muted loan growth … and lower M&A activity," they analysts add. Trading revenues could rise 2.5% in 2020.

However, the new Current Expected Credit Loss accounting model might "be a -0.2% drag on earnings per share" for some institutions.

"We believe that upside and downside scenarios are skewed modestly to the downside given ongoing trade war risks and our expectations for one more fed fund cut against low inflation and generally low economic growth," the KBW team explained.

— Check out Banks Set for Biggest Job Axe Since '15 as Morgan Stanley Cuts on ThinkAdvisor.