AlphaQ3 financials: fee engines are carrying the quarter
BlackRock and State Street posted double-digit revenue growth on market-linked fees, while Bank of America and Wells Fargo show balance-sheet banks paying for compliance and building reserves.
- BlackRock's AUM rose 15% to $15.5 trillion on $205 billion of Q3 net inflows; revenue rose 19% to $7.75 billion.
- State Street's total revenue rose 13% to $4.0 billion, with fee revenue up 11% and net interest income up 21%; AUC/A reached a record $59.2 trillion.
- Bank of America's Q3 net income fell to $6.9 billion from $8.3 billion, including a $1.2 billion charge for Bank Secrecy Act-related civil money penalties; net interest income rose 8%.
- Wells Fargo's provision for credit losses rose to $1.03 billion from $681 million, partly on higher allowances for commercial and industrial and auto loans.
The first wave of third-quarter results from U.S. financials splits cleanly in two. Firms paid on the value of assets they manage or hold are growing revenue at double-digit rates. Balance-sheet banks are growing more slowly and are absorbing costs that have nothing to do with the cycle.
The fee side
BlackRock ended the quarter with $15.5 trillion in assets under management, up 15% from a year earlier, after $205 billion of net inflows. Revenue rose 19% to $7.75 billion and as-adjusted diluted EPS rose 38% to $15.93. The company put annualized organic base fee growth at 11% for the quarter, which is the cleanest measure of growth that markets did not simply hand over.
State Street tells a similar story from the custody side. Total revenue rose 13% to $4.0 billion, fee revenue rose 11%, and net interest income rose 21%. Assets under custody and/or administration reached a record $59.2 trillion. Fee revenue is still roughly 78% of the total, so the business remains tied to asset levels and client activity more than to rates.
The balance-sheet side
Bank of America reported net income of $6.9 billion, or $0.91 a share, down from $8.3 billion, or $1.04. The quarter carried a $1.2 billion non-tax-deductible charge, or $0.17 a share, to accrue for civil money penalties tied to consent orders on its Bank Secrecy Act program. Strip that out and the operating picture is steady: revenue rose 3%, net interest income rose 8%, and the provision for credit losses was roughly flat at $1.3 billion.
Wells Fargo, which reported on October 13, earned $1.87 a share versus $1.66 a year earlier. Its provision for credit losses rose to $1.03 billion from $681 million, partly on higher allowances for commercial and industrial and auto loans, and its estimated CET1 ratio was 10.0%, down from 11.0% a year earlier, after $2.5 billion of buybacks in the quarter.
The AlphaGen view
Our read is that Q3 rewards scale in fee businesses and exposes the costs of running large balance sheets. In this set of releases, market-linked revenue is doing more of the work than lending spreads. For credit investors, nothing in these releases points to stress in the large-bank complex. Wells Fargo's reserve build and lower CET1 ratio are the details worth tracking into year-end, because they show where management sees risk and how much buffer it is willing to give up for buybacks.
For informational purposes only. Not investment advice. See disclosures.