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Magazine : Archives : 3rd Quarter 2011

Analyst Forum

July 21st, 2011 |

Market Intelligence

Banks stocks have been underperforming the S&P 500 index lately, especially the big banks, despite the fact they enjoy higher profitability than smaller banks. The big banks have been trying to work out a settlement with state attorneys general over foreclosure issues, and face the potential of even higher capital requirements in the years ahead, says Scott Siefers, a managing director and stock analyst at Sandler O’Neill & Partners in New York.

“The major concern is that while these (big) banks might be safer, they might be like utilities, safe but low growth,’’ he says.

Meanwhile, the economy also has been slow growing, which means even though delinquency rates for loans have been sliding, they aren’t plummeting. The Federal Deposit Insurance Corp. added four banks to its list of problem banks during the first quarter, to 888, the smallest addition in three-and-a-half years.

Top M&A Deals Announced through June: // Capital One Financial/ING Bank, June 16, $8.9 billion, 102 percent PTBV* //  PNC Financial Services/RBC Bank (USA), June 19, $3.4 billion, 97 percent PTBV* // Comerica/Sterling Bancshares, January 16, $1 billion, 229 percent PTBV*   (*PTBV is price to tangible book value)

What’s Ahead?

Fred Cannon, director of research and chief equity strategist for Keefe, Bruyette & Woods, talks about what investors really want and how rising interest rates could impact bank stocks.

What might change the underperformance of banks going forward?

It’s very important to recognize that the banks have underperformed the broad market for the last couple of years not necessarily because they haven’t been able to generate earnings, but because they’ve diluted the share count so much because of the capital raising.  It means stock prices just can’t recover to their pre-crisis levels. Citibank’s share count went from 5 billion shares to 30 billion shares.

What will be the impact of rising interest rates on bank stocks?

What you’re really looking for is banks that have both very sticky deposits that won’t leave, even when rates go up, and variable rate loans that will adjust upward with higher interest rates. I think on our list some of the ones who’ll benefit the most include Silicon Valley Bank, The PrivateBank out of Chicago, and Comerica.

What are bank investors looking for now?

The bank stocks haven’t performed great in the first quarter, but 74 percent of the 79 bank stocks we track met or beat earnings in the first quarter. It’s not just about beating earnings; it’s also about showing that you can grow your revenue.  Ironically, the region of the country that has the slowest loan growth historically is now having the best, which is the Northeast.

Forward looking statement: M&T Bank and then First Niagara, I think those are two good examples of banks who avoided much of the sins of the financial crisis, as their region did, and now are able to grow. 

Stock Retrospective

Collyn Gilbert, an analyst specializing in small and mid-cap banks for Stifel Nicolaus, follows up on her prediction a few months ago that there is an opportunity to own “a basket of potential sellers” among bank stocks. Now, she sees reluctance to sell.

“I think it’s still the right approach, but I fear the returns may not deliver until further out (next year),’’ she says. “Everyone is a buyer; nobody is a seller. My concern is the sellers don’t ever come to the table for negotiations. Their concern is they’ve made it through the worst of the financial crisis. If they have a shareholder base that is not all that institutional, do they feel the pressure to sell? I think prices are attractive. We’ve seen deals in the Northeast where price is near two times book value, such as the sale of Bancorp of Rhode Island, Danvers Bancorp and State Bancorp. But I thought we would have created a larger pool of sellers (by now).”

Loan Delinquency Rates Slowly Improve
Source: Trepp, LLC

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nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.