Loan Notes: Big Banks Lose Ground

The largest banks trailed the rest of the industry in terms of loan growth in the third quarter compared to the same period a year ago, according to SNL Financial.

Loan growth among the top 25 bank holding companies was just 3.27 percent during the quarter, compared to 4.2 percent for all bank holding companies above $1 billion in assets in the United States.

SNL called it a sign of how competitive the industry has been. The most active lending segments are commercial and industrial, as well as mortgage and housing-related lending. Credit card and auto lending also has been strong.

Among big banks, the leader in loan growth was TD Bank US Holding Co., the U.S. subsidiary of The Toronto-Dominion Bank of Toronto, Canada, which had 16 percent growth. Tied for second place was BB&T Corp. in Winston-Salem, North Carolina, and Discover Financial Services of Riverwoods, Illinois.

Among banks that saw declining loan portfolios were JPMorgan Chase & Co. in New York, Capital One Financial Corp. in McLean, Virginia, and Regions Financial Corp. in Birmingham, Ala.

Bank Assets Loan Growth Y/Y 3Q (%)

JPMorgan Chase & Co.

$2.3 trillion


Bank of America Corp.

$2.2 trillion



$1.9 trillion


Wells Fargo & Co.

$1.4 trillion


U.S. Bancorp

$352 billion


Source: SNL Financial

Stock Analyst: Own Bank Stocks Now

Anthony Polini is a managing director at Raymond James & Associates in New York and covers big and regional banks, such as JPMorgan Chase & Co., Citigroup Inc. and Hudson City Bancorp. This is a longer version of an interview that appeared in the fourth quarter issue of Bank Director magazine, where Polini talks about the cyclical nature of bank stocks and why they are a good investment right now given the country’s slow recovery.

What is your outlook for bank stocks?

You tell me the results of the presidential election, what interest rates are going to be by the end of the year and I’ll tell you what will happen with bank stocks. I personally think a Republican victory [in the presidential election] would be better for bank stocks and the stock market in general. The one caveat is interest rates. There is a point where you keep rates so low for so long, even if you have growth, the incremental yield comes down, which is a headwind for earnings growth.

One thing you have to realize is that bank stocks are cyclical. For many years, bank stocks were viewed as interest rate plays but in reality, they are very cyclical. A positive comment from the Federal Reserve [chairman Ben Bernanke] could send stocks up 5 percent. Increased concern about Spanish debt could mean Citigroup, JPMorgan and Bank of America lead the market lower. If the news is generating a negative outlook, the banks are going to move down.

Given the fact the bank stocks are cyclical, is this a good time for investors to buy them?

You want to load up on bank stocks in the middle of a recession. Sometimes you are in a recession for several quarters before you [determine] when the recession began. You want to overweight banks from the latter stages of a recession to the mid-stages of a recovery. One of the problems with this recovery is we are in the early stages of a recovery. It is slow. The economy is on two or three cylinders, not eight cylinders.

So you think investors should be sure to have bank stocks in their portfolio? What are your favorite picks?

Yes. You have some that are super, high-quality names and have high dividends. Those banks tend to lag [the rest of bank stocks] on positive days. A top pick in that category has been [the $43.5-billion asset] New York Community Bancorp. NYB is the ticker symbol. We have it rated a strong buy. It has a dividend yield of 7.5 percent and trades slightly above book value. It’s at a relatively safe valuation to play the sector and pick up a high dividend yield.

The mega-cap banks clearly have the most attractive valuations. They also have more risk related to the global economic outlook. They probably have more volatility than the small- to mid-cap banks. In general, the more defensive names tend to be the smaller banks with less global exposure.

We’ve had very few M&A deals lately. But two of the banks you cover are merging in one of the biggest deals all year. M&T Bank Corp. is buying Hudson City Bancorp. What’s your take on that deal?

I think Hudson City was on everybody’s list as a likely seller this year. The chief executive officer recently had some health issues. It is a quality franchise but the business model—leveraging up debt, sticking to residential mortgages—[isn’t] as good as it used to be. I think they were under pressure to redefine themselves, which they started to do, and I think the decision to sell was probably a wise one. What M&T paid didn’t look exorbitant. [The deal value was $3.8 billion, or 85 percent price to tangible book value.] Another way to look at it is, it’s a very good deal for M&T. It’s not a huge deal but it’s a good deal for them. It was a good price. The only thing that didn’t make sense to me was the high cash component, [60 percent was stock and 40 percent was cash]. Both stocks have done well since the announcement. But if you are going to sell cheap without a bidding process, one would think you would take all stock.

Bank Earnings Trends

The Federal Reserve’s actions in response to the U.S. economy’s sluggish growth and high unemployment rate have virtually ensured depressed bank earnings for the foreseeable future.

The Federal Open Market Committee (FOMC) recently proclaimed that it will “keep the target range for the federal funds rate at zero to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” In addition to keeping interest rates “exceptionally low,” the Fed is embarking on another round of quantitative easing (QE3)—this time with no end date in sight. Indeed, the spigot is now open.


The obvious impact to bank earnings of Fed Chairman Ben Bernanke’s monetary policies is that net interest margins will continue to contract as we have seen virtually every quarter since 2010. Deposit costs are as low as possible, and loan yields will continue to decline as higher rate loans are replaced with lower yielding assets. Interestingly, as the chart [below] depicts, banks with assets less than $1 billion have been able to sustain higher net interest margins than their larger brethren, who have brought down the industry’s margins in lock-step. Banks less than $1 billion maintain a net interest margin of 3.75 percent, while those greater than $1 billion average a net interest margin of 3.42 percent through Q2 2012.  Nevertheless, the majority of banks of all sizes are seeing NIM contraction.


When margins contract, banks are forced to pull other levers in order to maintain consistent net income streams:

  • As asset quality has improved across the industry, banks have been able to release reserves back into income, although at some point this strategy will end as banks are unable to continue depleting their reserves.
  • Declining interest rates have meant increases in the value of securities portfolios for many banks which, in turn, increased income from realized gains on sale; however, securities yields will continue to decline during the low interest rate environment and future gains on sales will decline.
  • Noninterest income is notoriously difficult to generate—especially for community banks—and lawmakers have cracked down on fees such as overdraft, rendering this strategy more or less futile.
  • Banks can streamline operations and become more efficient, although at some point this strategy faces diminishing returns.


All the strategies above can help maintain earnings for the short term, but eventually they will leave bankers grasping at air without any more levers to pull. Absent an increase in net interest margins, returns on assets will continue to decline; this is inevitable. At that point, banks will face a choice: increase credit risk and loan volume to generate yield, increase interest rate risk by stretching for yield, or accept diminished returns. Certainly, one unintended consequence of Chairman Bernanke’s policies is that banks will begin to take on more credit and interest rate risk, threatening the industry’s renewed strength once again.

However, another strategy exists to increase shareholder value: exploring an acquisition or merger is one of the only ways to increase returns in today’s environment. Both buyers and sellers can benefit greatly from this strategy if the right deal is struck. A buyer can increase its net interest income by combining with a partner that has higher yielding assets or a lower cost of funds. Furthermore, cost savings can result in a more efficient operation. Likewise, sellers tired of fighting for returns—particularly those small, community banks—can achieve a liquidity event and cash out or ride the buyer’s stock, resulting in returns that could take years to achieve on a standalone basis.

Banks can expect at least another three years of difficult returns. Thankfully, the industry’s balance sheets are healthier, and it is likely industry consolidation will pick up precipitously as a consequence.

Small Banks See Small Gains in Valuation: An Update on the Little Guys

where-u-stand.pngSmall bank stocks that don’t trade on the big exchanges have missed out on the price gains of the big bank stocks lately. During the third quarter, the Monroe Securities community bank stock index rose .7 percent and its thrift index climbed 4.1 percent, while the SNL Bank and Thrift Index climbed 7.1 percent, according to the firm, which is a market maker for more than 1,000 community bank stocks.

That’s a change from the second quarter, when big banks were sucking wind and community stocks saw slight gains.

Valuations for community banks improved slightly during the third quarter. The average price to tangible book value for community banks, defined as banks below $1 billion in assets, was 78 percent, according to Monroe Securities. That was an improvement from about 76 percent in the prior quarter but a big climb from end of 2011, when community bank stocks sunk to a low of about 66 percent price to tangible book value.

The number of small bank mergers or acquisitions improved slightly in the quarter, at 49, compared to 45 the quarter before, and 50 deals in the first quarter. M&A deal values fell a bit, from 125 percent of tangible book value to 95 percent in the third quarter.

Monroe Securities uses stock values based on OTC Markets and OTC Pink, an electronic bulletin board for stocks that don’t trade on the New York Stock Exchange or NASDAQ OMX.

For the full report, click here.

* Trends are based off banks with less than $1 billion in assets.
* Source: Monroe Securities

Why Elections Are Good For Bank Stocks

election.jpgKeefe, Bruyette & Woods’ [research] team is out with the note: “The Election Edge: Elections Have Historically Benefited Financials,” which reviews the impact of recent U.S. presidential elections on the equity market and financial stocks.

While performance trends from the ’08 election are undeniably impacted by the financial crisis, we still found several overarching trends. For a longer performance history, we used the NASDAQ Bank Index to measure trends in bank stocks around elections back to 1984, the first year the exchanges were open on Election Day. We are unable to replicate such long-dated analyses for the other financial industry groups due to lack of industry index data prior to 1995 and in some instances, the lack of an investable public equity universe historically (e.g., REITs).

  • Financial stocks rallied and outperformed the market going into three of the last four presidential Election Days. Financials outperformed the market and posted gains in the YTD period up to Election Day in ’04, ’00 and ’96. This outperformance did not hold true in ’08, when financials were impacted by the financial crisis. However, similar trends are playing out in ’12 through 9/21 as financials increased 21.8 percent while the S&P 500 index (SPX) rose 16.1 percent.
  • Among financials, banks consistently outperformed the market going into the last four elections. Both large and small to mid-cap banks (SMID) outperformed the SPX in the ’08, ’04, ’00 and ’96 elections. As with the financials, similar trends are playing out in ’12, with the large-cap banks rising 27.5 percent and SMID-cap banks increasing 17.6 percent, both outperforming the SPX’s 16.1 percent gain.
  • Longer-term analysis back to the 1984 election shows similar outperformance trends for banks. Banks as represented by the NASDAQ Bank Index outperformed the SPX during the year-to-date period up to Election Day in all seven presidential elections going back to 1984.
  • Similar performance trends hold true for the four-week period leading up to Election Day. Financials outperformed in the ’08, ’00 and ’96 elections over the four weeks prior to Election Day while banks (large- and SMID-cap) outperformed during this period in all four last elections. Banks, as represented by the NASDAQ Bank Index, also outperformed in this four-week period prior to Election Day in every election since ’92.
  • Election Day is not historically a market-moving event. With the exception of 2008, the SPX rose between 0 to 1 percent on Election Day. Financials exhibited similar performance, ranging from a decline of 0.4 percent to a gain of 1.6 percent in the ’96-’04 elections.
  • Financial stocks underperformed post-Election Day through year-end in three of the last four presidential elections. Financials lost their steam once the election was over, underperforming the market in the post-election period in ’08, ’04 and ’96.
  • Despite the underperformance of financials, life insurers and diversified financials outperformed post-Election Day through year-end in three of the last four elections. Life insurers and diversified financials underperformed the market and posted losses after only the ’08 election, when performance was significantly impacted by the financial crisis. Long-term post-Election Day results are mixed for the banks, with the NASDAQ Bank Index underperforming the SPX in three of the last seven elections (’08, ’04, ’88).
  • Election Day is rapidly nearing and will occur on Tuesday, November 6.

Bank Waters Will Remain Choppy

Ken Usdin is a managing director in the equity research department for Jefferies & Co. in New York, where he covers large regionals such as Fifth Third Bancorp and BB&T Corp.  In this longer version of an interview that appeared in Bank Director magazine’s third quarter issue, he talks about his predictions for the future of bank stocks, his favorite stock picks and what investors are looking for now.

We’ve seen the banking sector outperform the S&P 500 this year, but bank stocks haven’t done so well since March. Why?

There is not a lot of conviction about the macro-economy and Europe. There are concerns about the election here in the U.S. There is a slowing rate of economic growth in the U.S. I think the market for the bank stocks is going to be pretty choppy for the next several months. The fundamentals are OK but they’re not getting much better.

What are your favorite stocks?

PNC Bank is one of the high quality banks. They have a good growth trajectory—they just bought Royal Bank of Canada’s business in the U.S. so they’ll have some cost savings from that and some growth opportunities as they start to move their people and processes into a new territory for them, which is the Southeast. They have a conservative credit portfolio and [the stock] has a reasonable valuation. I’ve been of the view that you need to have high quality and low quality names. What happens is when people get fearful of the market, people tend to hold onto high quality names and sell their low quality ones. The [low quality] story we like the most is SunTrust Banks. What I like about that is they have a bunch of cost savings programs they’ve implemented. They’ve had a bigger burden relative to other banks from the credit crisis, especially from mortgages. As those costs continue to abate, they’ll have a nice pickup in earnings.

I really thought we would have a better understanding of how regulation is going to affect this sector by now. Do you think you have a better idea of how the Dodd-Frank Act is going to impact the sector than you did a year ago?

The only thing that is consistent from last year is that is going to cost a ton of money. I think the smaller banks are going to feel it bigger than the big banks. It is going to be a long, drawn out process to get compliant. We really just don’t know some of the impact. Costs are going to continue to spiral upwards as it relates to Dodd-Frank.

What are the most important performance metrics for investors and do you see that changing?

Loan growth. One thing people are really focused on is: Can banks grow loans through this tougher environment? Can banks hold up their interest margins? Those are the two most important things that I’m looking for, in terms of being able to sustain an earnings projector. 

Bank M&A Deal Volume, Pricing Remains Steady

Bank mergers and acquisition deals have remained at a steady pace so far in 2012, with 108 deals announced through July 9 having an aggregate deal value of $5.28 billion, according to SNL Financial.

The median price to tangible book value in the second quarter was 110.7 percent, compared to 116.3 percent in the first quarter, and 109 percent in the second quarter of last year.

In 2011, the median price to tangible book value was 106 percent and in 2010, it was 116 percent.

Federal Deposit Insurance Corp.-assisted deals were excluded from the figures.

In 2011, there were 177 transactions announced with a total deal value of $17 billion, compared to 215 deals in 2010 valued at $12.3 billion, according to SNL.

Other trends:

Since Jan 1, 2011, the Midwest has been the most active region for bank M&A, with 76 deals announced, followed by the Southeast, with 53.

The largest bank deal since Jan. 1, 2010, was McLean, Va.-based Capital One Financial Corp.‘s June 16, 2011, agreement to buy Wilmington, Del.-based ING Bank FSB for $9 billion, representing 102.2 percent of the target’s tangible book. This also marks the largest bank deal since 2008, when Wells Fargo & Co. acquired Wachovia Corp. for $15.1 billion. 

Bank stocks: “It’s really been a lost decade.”

audit12-hovde.jpgBank stocks rallied earlier this year but then faltered mid-year in the throng of worries about the European debt crisis.

“It’s really been a lost decade,’’ said Steve Hovde, the president and chief executive officer of The Hovde Group, an investment bank that focuses on  the financial services sector. He was speaking at Bank Director’s Bank Audit Committee Conference this month in Chicago.

Looking at bank stocks going back to 2007, when valuations reached their peak, the U.S. SNL Bank and Thrift index was down about 60 percent through May.

The current global outlook has put a good deal of pressure on bank stocks lately, as well. Even banks that don’t have exposure to European debt are feeling the heat, as the crisis will put a drag on the U.S. economy, Hovde said.  And a weak U.S. economy will do nothing for U.S. banks.

“Until we see a healthy economy, we’re not going to have a healthy banking sector,’’ he said. “Until we get employment back, the banking sector is going to have pressure.”


Housing still is a drag on the economy. Moody’s Analytics has predicted that home values, while improving in some markets, won’t return to pre-crisis levels until 2017. Home prices have lost about one-third of their value since hitting a peak in 2006, according to the Fiserv Case-Shiller composite index.



On the other hand, banks have been getting rid of bad loans and improving their balance sheets. On the credit side, net-charge offs of bad loans are declining, and tangible capital ratios are slowly being rebuilt, Hovde said.

Profitability has improved, as well, as banks reduced their loan loss provisions year-over-year in each of the past four quarters.

Return on average assets has risen to an average of 1 percent in the first quarter of 2012, up from .76 percent in the fourth quarter of last year, according to the Federal Deposit Insurance Corp.


A strengthening bank sector has led to slightly better deal pricing in mergers and acquisitions, but deal volume is still very low.


Uncertainty about commercial real estate and housing values still is hindering deals, as well as the fact that the stock of many buyers and sellers’ is trading below book value, Hovde said.

The glut of failed banks could also be putting a crimp on deals in some markets, and Hovde predicted that the Chicago area alone will probably have another 10 to 15 bank failures.  Nationwide, there were 403 banks with a Texas ratio greater than 100 percent as of March 31, according to SNL Financial LC. A Texas ratio greater than 100 is an indicator of potential failure. There were 59 banks with a Texas ratio greater than 300 percent, and 36 of them are in the Southeast.

Still, the pace of bank failures has slowed and many buyers are beginning to turn their focus to non-FDIC assisted deals, he said.

“With M&A I think we’ve probably hit the bottom and will probably see it pick up absent another global financial crisis,’’ Hovde said.

Analyst Report: Community Banks Saw Improving Metrics In The First Quarter

piggy-bank-health.jpgInvestment firm McAdams Wright Ragen has recently released its first quarter 2012 Community Bank Report which includes over 1,100 publicly traded banks and thrifts and provides data broken down by asset size as well as by region. The report is a unique look at many of the banks that aren’t traded on the NYSE Euronext or NASDAQ OMX, which so get little attention in the world of equity research. When looking at a bank’s asset size in comparison to the level of non-performing loans still held on the books, the statistics show a wide variation between the largest and smallest institutions. The average Texas ratio for the largest institutions (28 percent) is much lower than that for the smallest institutions, those with under $250 million in assets (43 percent). A similar story plays out in values. Banks above $25 billion in assets traded at an average of 129 percent of tangible book value. Banks below $250 million in assets traded at an average of 69 percent of tangible book.  Smaller banks have less access to capital markets, which could impact values, but many of them have more troubled loans on the books as well, which impacts the Texas ratio. A ratio above 100 percent is an indication of a potential bank failure.

When examining regional trends, every region has seen improvement in recent quarters in almost every important metric (price/tangible book, price to earnings ratio, Texas ratio, tangible equity/tangible assets). The three areas of the country where the banks have seen the greatest improvement in price and credit (the Southeast, Southwest and the Midwest) were hardest hit by the depression in the housing market and credit crunch. While these regions’ cumulative statistics have seen the greatest improvement since the third quarter of 2012, they still lag behind those of the Northeast and West.

The full report can be accessed here.