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Weighing Stumpf's survival odds and Wells' succession options

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


Weighing Stumpf's survival odds and Wells' succession options

EmbattledWells Fargo & Co.Chairman and CEO John Stumpf has vowed to stay in his post and right the shipfollowing a phony-account scandal that resulted in big hits to the SanFrancisco-based bank's reputation, stock and confidence in its leadership.

Butamid repeated verbal assaults from lawmakers and a deluge of negativeheadlines, analysts and investors are wondering aloud if Stumpf can hold onto thejob. If he cannot, there is an additional layer of worry over whether Wellscould feasibly promote the executive waiting in the wings per the company'sclearly telegraphed succession plan or if it will be forced to start fresh withan outside hire.

"Thereis still time to recover and move on," ViningSparks analyst Marty Mosby said in an interview. He noted that Chairman andCEO Jamie Dimon, for example, endured heavy criticism following the 2012 "London Whale" controversy that cost thatcompany billions of dollars. But Dimon retained both his chief executive title and his seat atthe head of the board.

SNL Image
Timothy Sloan
President and COO, Wells Fargo & Co.

Source: Wells Fargo

Mosby thinks Stumpf can survive ifWells in coming weeks can show that it has its arms around the breadth of thesham account-opening scandal, for which regulators fined the bank $185 million.Authorities said the bank'spressure-cooker salesculture motivated front-line staffers to open troves of deposit and credit cardaccounts without customers' knowledge.

Stumpfhas since agreed to forgo more than $40 million in compensation, and Wellshas fired some 5,300 staffers linked to the fake accounts. The bank also saidit ended product sales goals for branch staffers this month, among otherchanges. Next up is earnings season. Mosby said that when Wells reports laterthis month, analysts and investors will want assurances that customers are notfleeing the bank, and that Wells has found ways to convince clients that itswoes are isolated and manageable, as JPMorgan did a few years ago.

That,however, is hardly a sure thing. In recent days, theState of Californiasaid it suspended Wells from participating in certain business relationshipsfor 12 months. The State of Illinois followed suit, saying it would suspend"billions of dollars in investment activity" with Wells.

Amplifying such news were scorching appraisals by U.S. Housemembers during a committee hearing last week. One after another, Democrats andRepublicans ripped into Stumpf. "Something is going wrong at thisbank, and you are the head of it," said Rep. Gregory Meeks, D-N.Y."You should be fired." Added Rep. Roger Williams R-Texas: "I'vegot one simple question for you: When are you going to resign?"

Against that backdrop, and amid punishing blows to a stockthat is down more than 10% since regulators announced the fines Sept. 8, doubtsare brewing about Stumpf'sfuture.

"He'sprobably going to be gone soon," Mike Matousek, a trader at U.S. Global Investors Inc. who tracks big banks,said in an interview. He noted that, unlike JPMorgan's past debacle, the Wellsproblem directly affected scores of ordinary customers — voters who lawmakers are eager to impress with ongoing pressure on thebank. "It's just such a big disaster."

IfStumpf steps down, Sloan, a Wells veteran of nearly 30 years, is the designatedreplacement. Late last year Wells promoted the former CFO and chief administrative officer from head of wholesalebanking to president and COO. Mosby said that, while another insider such ascurrent CFO John Shrewsberry could conceivablymove up to CEO, Sloan's 2015 promotion made him the heir apparent, andthere has been no word from the bank in recent weeks indicating that haschanged. "Ithink Sloan is really the only option internally," Mosby said. He notedthat most of Sloan's recent experience has been on the wholesale side as opposed to retail, where Wells' troubleslie. That could give Sloan "somecover" from the controversy and allow the bank's board to promote him ifStumpf leaves.

Thatsaid, as COO, Sloan works alongside Stumpf andshares in oversight and strategic planning for all of the company's majorbusiness lines. As such, he is not immune to the scandal. Mosby said that ifintense lawmaker and investor pressure persists well beyond earnings, the Wellsboard may determine it needs to wipe the slate clean and bring in a CEO fromoutside.

Mosbyand others think that holds little appeal at this stage because it could takeyears for someone from the outside to get up to speed on Wells' variousbusinesses and markets, all while trying to putout the fires of controversy. Talent turnover could mount and growth could cometo a halt. "They would be hitting the start-over button, and theywould have a lot to deal with for at least a couple years," Mosby said,adding that it is not clear who on the outside would be both qualified andwilling to step into the job under those circumstances.

Wells' lead independent director, former General Millsexecutive Stephen Sanger, could fill the role on an interim basis in the eventof a protracted search.

CharlesWendel, president of Financial Institutions Consulting Inc. and a formerbanker, agreed with that assessment. He said in an interview that while hethinks Stumpf "should survive" because of his myriad accomplishmentsin growing Wells over the years — and because achange could cripple future growth — the CEO may decide he needs to step downif the controversy drags on. Wells might then have to look outside for areplacement.

"Ido not think that is the first option, though, for anyone makingdecisions" at Wells, Wendel said. Given the bank's size and complexity,"it absolutely would be very difficult for someone on the outside to comein and do that job. And it could be hard to find the person willing to doit."  


Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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