A bank’s liability mix is a significant competitive advantage that acts as an organic interest rate hedge for both the assets in the investment portfolio and the full balance sheet.
There are many opportunities in the fixed income universe right now, given the significant increase in both yields and yield spreads. In such a volatile interest rate environment, a thorough investment process becomes even more critical in evaluating such opportunities. We advise all of our financial institution clients to focus on process, rather than considering individual investment options in the context of the rate outlook. Regardless of any bank’s specific objective for its portfolio, the ultimate goal should be to maximize return per unit of risk taken.
It’s critical that banks have a well-defined investment process and decision-making framework to ensure the portfolio generates reasonable risk-adjusted returns. A successful fixed income manager should use both rigorous trading-level analytical models and a data- and research-oriented framework. As a best practice, managers should also consider relative value analysis using robust trading level analysis in an option and credit adjusted framework.
Exhibit 1 displays a portfolio management process that begins with an assessment of the overall balance sheet risk profile.
Banks should manage the securities portfolio within a sound asset liability management framework, which accounts for the balance sheet’s existing relationship between the asset and liability risk profiles. Depository investors don’t manage their investment portfolios in a vacuum; overall balance sheet interest rate, liquidity and credit risks should be considered in the development of the investment strategy and overall portfolio objectives. Once executives establish portfolio objectives, it’s important to ensure the guidelines/policy allow for successful implementation of the strategy.
From here, top-down market themes lead the way through the investment process. Top-down themes communicate the current assessment of various market metrics and risk factors, which drive sector allocation decisions. Security selection, risk budgeting and risk measurement round up the assessment, followed by post-performance evaluation.
Actively managed fixed income portfolios are at some stage of this process at all times. It’s important to note that there’s no discussion here on the direction of rates or when and how the Federal Reserve is going to move. Portfolio management decisions dependent upon a particular path of interest rates have no place in this in this process. Instead, portfolio performance comes from risk measurement and management, as well as sector and security selection.
Why Banks Need Analytical Models
It’s vital that banks have analytical models to identify and measure risks and potential returns. In today’s dynamic fixed income markets, the complexity of the assets or asset classes means there’s an increased need for robust models.
Exhibit 2 shows this graphically. The line in the sand is clearly drawn between option and credit embedded assets and their other, simpler cousins.
Mortgage-backed securities are better evaluated using Monte Carlo simulations, given the path-dependent nature of the prepayment option, while it’s best to evaluate callable bonds using a lattice approach. Interest rate and option models should price market instruments accurately and be arbitrage free; prepayment models should exhibit a “best data fit” approach. Without these tools, banks will be unable to properly evaluate market pricing of such assets.
Don’t forget the popular phrases “model users beware” and “use models at own risk.” Models are only as good as the assumptions that go into them, requiring human capital investments to properly manage robust analytical systems. Proceed cautiously: understand the inputs and assumptions and be critical of outputs. That’s why feedback loops are such an important component of the overall investment process: Models can help us make decisions, but they are not the end all, be all.
A growing number of banks are turning to experienced external advisors, both for guidance and to outsource specialized functions like investment and balance sheet advisory. An institutional asset manager can provide the tools and resources — both systems and human capital —to build and maintain high performing bond portfolios at a fraction of what it may cost to attain those resources internally.
When seeking outside counsel on investing, banks must understand how that advisor is compensated, such as fee based or commission, and measure performance relative to the stated portfolio objectives. That said, a thoughtful and disciplined investment process can lead to more consistent and predictable earnings from the fixed income portfolio.
ALM First Financial Advisors is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. All investing is subject to risk, including the possible loss of your entire investment.
The content in this article is provided for informational purposes and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While such information is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Statements herein that reflect projections or expectations of future financial or economic performance are forward-looking statements. Such “forward-looking” statements are based on various assumptions, which assumptions may not prove to be correct. Accordingly, there can be no assurance that such assumptions and statements will accurately predict future events or actual performance. No representation or warranty can be given that the estimates, opinions or assumptions made herein will prove to be accurate. Actual results for any period may or may not approximate such forward-looking statements. No representations or warranties whatsoever are made by ALM First Financial Advisors as to the future profitability of investments recommended by ALM First Financial Advisors.
It’s time for community financial institutions to significantly upgrade their investment resources to service their clients. Retail investors want to be more educated about investing opportunities and have greater access to investment tools; in response, investment-as-a-service companies are building platforms so banks can give their clients more of what they want.
One problem with financial and investment innovation today is that there is either too much focus on gimmicks or not enough focus on innovation. Crypto-only investment companies indiscriminately pitch every token as the latest and greatest get-rich-quick scheme. Gamified investment apps promote risky options trades to retail investors, turning investing into a lottery or casino and distracting users from what investing should be: a powerful tool to maintain, protect and build wealth. Further, legacy investment institutions often make the bulk of their revenue from customers who are already wealthy via older products, with little incentive to experiment with creative new offerings.
In this unhappy mix, it is investors with the most to gain from a long-term investing strategy — younger less affluent or not yet rich investors — who lose the most. Unable to access wealth management and investing services from their trusted financial institution, they seek out third-party investment apps that don’t prioritize their long-term success and happy retirement. For community financial institutions, this interrupts the chain of familial wealth transfer and risks their next generation of customers.
Investors desire a unified platform that offers access to a growing list of investments, ranging from physical metals to AI-driven investment models to crypto-assets to collectibles. A self-directed platform is key: Investors should be given a choice to pursue the investment strategy they feel fits best for their unique investment interests and risk profile. The platform should include all the tools they need to effortlessly pursue the “Get rich slowly” strategy: passive investing and dollar-cost averaging into a low-cost, highly diversified portfolio.
Cloud computing innovations and numerous rounds of fintech venture capital have made it possible for companies to build curated investment platforms that traditional banks can easily add and implement. Investment tools driven by application program interfaces, or APIs, allow financial services to embrace change in collaborative ways that don’t conflict with existing business, yet still appeal to the ever-changing preferences of investors.
Investing is not one-size-fits-all. Wine fans may want to invest in a portfolio of wine assets to hold or eventually redeem. Investors who collected baseball cards as a kid may now have the capital to buy collectibles with significance to them as culturally relevant assets. Individuals also may want to invest in thematic categories, like semiconductors — the foundation for all computing, from electric vehicles to computers to smartphones. These investments are not optimal for everyone, but they don’t have to be for everyone. What matters most is access.
Too many banking platforms do not take full advantage of the full range of investment tools available in the marketplace, even though their clients are looking for these. Lack of access leads to painful experiences for the average investor who wants to be both intelligent with their money and allowed to experiment and explore the ever-changing world of digitally available investment categories. Give customers a choice to pursue wealth-building strategies based on their unique insights and instincts, and made available through their existing bank.
Banks are doing very well, if you look at credit quality and profitability. But tell that to investors.
Last week, the Federal Open Market Committee raised the target federal funds rate by 75 basis points, the third hike of that magnitude in a row, to combat inflation.
The market has punished equities lately in response, but even more so, bank stocks, probably in anticipation of a recession that may have arrived. The S&P 500 fell 21.61% in 2022 as of Friday, Sept. 23, but the S&P U.S. large cap bank index was down 25.19% in that same time frame, according to Mercer Capital using S&P Global Market Intelligence data. By asset size, large banks have seen the biggest declines so far this year.
Going back further in time, the cumulative return for U.S. bank stocks in general, as measured by the S&P U.S. BMI Banks index, was down 5.30% as of Sept. 22 from the start of 2020, compared to a gain of 21.55% for the S&P 500.
Investors’ dim view of bank stocks belies the underlying strengths of many of these banks. Bank net income of $64.4 billion in the second quarter was higher than it had been in the same quarter of 2018 and 2019, according to the Federal Deposit Insurance Corp. Since 2019, in fact, bank profitability has been going gangbusters. Rising interest rates improved net interest margins, a key profitability statistic for many banks. Plus, loan growth has been good.
And credit quality remains high, as measured by the noncurrent loan and quarterly net charge-off rates at banks, important bank metrics tracked by the FDIC. Despite weaknesses in mortgage and wealth management, this combination of variables has made many banks more profitable than they were in 2018 or 2019.
“Earnings are excellent right now, and they’re going to be even better in the third and fourth quarter as these margins expand,” says Jeff Davis, managing director of Mercer Capital’s financial institutions group.
Investors don’t seem to care. “It’s been a real frustration and a real incongruity between stock prices and what’s going on with fundamentals,” says R. Scott Siefers, managing director and senior research analyst at Piper Sandler & Co. “You’ve had a year of really great revenue growth, and really great profitability, and at least for the time being, that should continue. So that’s the good news. The bad news is, of course, that investors aren’t really as concerned with what’s going on today.”
Worries about a possible recession are sending investors away from bank stocks, even as analysts join Davis in his prediction of a pretty good third and fourth quarter for earnings this year. The reason is that investors view banks as sensitive to the broader economy, Siefers says, and think asset quality will deteriorate and the costs of deposits will rise eventually.
The place to see this play out is in two ratios: price to earnings and price to tangible book value. Interestingly, price to tangible book value ratios have remained strong — probably a function of deteriorating bond values in bank securities’ portfolios, which is bringing down tangible book values in line with falling stock prices. As a result, the average price to tangible book value as of Sept. 23 was 1.86x for large regional bank stocks and 1.7x for banks in the $10 billion to $50 billion asset range, according to Mercer Capital.
Meanwhile, price to earnings ratios are falling. The average price to earnings ratio for the last four quarters was 10.3x for large regional banks, and 11.4x for mid-sized bank stocks. (By way of comparison, the 10-year average for large cap bank stocks was 13.4x and 14.6x for mid cap bank stocks, respectively.)
For bank management teams and the boards that oversee them, the industry is entering a difficult time when decisions about capital management will be crucial. Banks still are seeing loan growth, and for the most part, higher earnings are generating a fair amount of capital, says Rick Childs, a partner at the tax and consulting firm Crowe LLP. But what to do with that capital?
This might be the perfect time to buy back stock, when prices are low, but that depletes capital that might be needed in a recession and such action might be viewed poorly by markets, Childs says. Davis agrees. A lot of companies can’t or won’t buy back their own stock when it’s gotten cheap, he says. “If we don’t have a nasty recession next year, a lot of these stocks are probably pretty good or very good purchases,” he says. “If we have a nasty recession, you’ll wish you had the capital.”
It’s tricky to raise dividends for the same reason. Most banks shy away from cutting dividends, because that would hurt investors, and try to manage to keep the dividend rate consistent, Childs says.
And in terms of lending, banks most certainly will want to continue lending to borrowers with good credit, but may exercise caution when it comes to riskier categories, Davis says. Capital management going forward won’t be easy. “If next year’s nasty, there’s nothing they can do because they’re stuck with what’s on the balance sheet,” he says. The next year or two may prove which bank management teams made the right decisions.
In 2004, Blockbuster was a vibrant company that employed 60,000 people and provided home movie and video game rental services through a network of 9,000 retail stores throughout the United States. Then everything got disrupted.
Two Blockbuster competitors—Netflix and Redbox—began experimenting with alternative forms of distribution, Netflix through the mail and Redbox through, yes, red boxes located at grocery and convenience stores. These low cost delivery systems gave Netflix and Redbox a significant competitive advantage. Blockbuster, slow to respond to the disruptive impact on its brick and mortar business model, went into a downward spiral that eventually led to bankruptcy in 2010. The company was later acquired by Dish Network Corp., which closed the last of its Blockbuster stores in 2014. Today, the brand name survives only as video streaming services to Dish customers and the general public.
Is there a lesson to be learned here for the banks? You better believe it. The digital financial services space is exploding in activity as new technology companies push their way into markets and product lines that traditionally have been the banking industry’s turf. Usually, these so-called fintech companies focus on one or two product lines, which they distribute online at a significantly lower cost than traditional banks because banks still are holding on to their expensive branch networks. And doesn’t that sound a lot like the Blockbuster scenario?
Blockbuster did try to expand its distribution channels to include mail and streaming video, but it probably waited too long to make that change. There are in fact countless examples of disruptive business trends in U.S. history (airplanes taking passengers and trucks taking freight away from trains, or mobile phone carriers supplanting traditional telephone companies), and they share a common theme: The incumbents often responded to disruption too slowly and either failed, like Blockbuster, or managed to survive but at a permanently reduced state, like the railroads.
Often the disruptors were initially dismissed by the incumbents as not posing much of a threat, and you have to wonder if we’re seeing a similar scenario playing out today in banking. “Banks look at these upstarts with a kind of, hey, they are nice little experiments but what the fintech companies are doing isn’t really relevant,” says Anand Sanwal, chief executive officer at New York-based CB Insights, which tracks investor activity in the fintech space. “The problem is, today’s nice experiments are tomorrow’s disruption.”
In a March 2015 report on the emerging fintech sector, Goldman, Sachs & Co. estimated that over $4.7 trillion in revenue at traditional financial services companies is at risk of disruption by new, technology-enabled entrants. In a report two years ago, the consulting firm Accenture saw an equally challenging future for traditional banks. “A number of emerging trends—including digital technology and rapid-fire changes in customer preferences—are threatening to weigh down those full-service banks that limit themselves to products and services that get distributed primarily through physical channels, particularly the branch,” the report said. “Given the scale of these disruptions, our analysis shows that full-service banks, as a group, could lose 35 percent of their market share by 2020.”
Disruption is not new to the banking industry. It has been occurring in the payments space where companies like PayPal, Google, Square and American Express Co. have developed alternative payments systems that threaten to chip away at the banking industry’s market share over time. But it isn’t clear whether most banks see payments as a profit center or just the necessary plumbing to facilitate transactions. However, since the financial crisis there has also been a great deal of activity by fintech companies in the lending space—which is squarely where most banks make most of their money.
The new fintech lenders fall into two general categories. One group is made up of those companies that focus on consumers and small businesses and hold some loans on their balance sheet. These are often referred to as direct lenders and examples include Kabbage and CAN Capital. (See interview with Kabbage CEO Rob Frohwein) A second broad group, often called marketplace or peer-to-peer lenders, originate consumer and small business loans and sell them to investors, and increasingly banks, instead of keeping them on their balance sheet. Companies that fall into this category include Lending Club and Prosper Marketplace Inc.
The strategy of most fintech companies is to focus on a specific activity rather than compete with traditional banks across the full spectrum of their consumer and business product lines. So while fintech companies individually might pose little, if any, threat to banks, in the aggregate—and across all their full range of activities—they are doing everything that banks do. The infographic on the facing page, provided by CB Insights, shows many of the fintech companies that offer the same products that are provided today by San Francisco-based Wells Fargo & Co.—the country’s fourth largest bank at approximately $1.7 trillion in assets—and brings to mind a modern Gulliver who is under assault by the Lilliputians. “They are being attacked on all these fronts now by companies with new technology,” says Dan Latimore, a Boston-based senior vice president in the banking practice at the consulting firm Celent.
The emergence of such a large and vibrant fintech sector is driven by a variety of factors, beginning with the widespread acceptance among borrowers of conducting financial transactions online or with their smart phones. “Consumer behavior is changing pretty rapidly,” says Halle Bennet, a managing director at the investment bank Keefe Bruyette & Woods in New York. “Technology is now involved in everyday life and financial services is part of that. People like convenience and expediency and that is almost antithetical to conventional banking.”
It’s also true that the banking industry has been distracted by a series of events during the last several years while the fintech revolution was unfolding, first by the financial crisis and Great Recession and later by tough new laws and a more vigorous regulatory environment that forced them to raise capital and focus more of their attention on compliance. The result was a pull back from some consumer and small business markets just when newly emerging fintech companies were beginning to focus on them. “It would be hard to overestimate the extent to which banks pulled back from small business and consumer lending,” says Brendan Dickinson, a principal at Canaan Partners, a New York-based venture capital firm that invests in technology companies including several in the fintech space.
There are actually two kinds of investors in the fintech companies. One category, like Canaan Partners, provides debt and equity funding to the companies themselves, where they see an opportunity to leverage advancements in technology and create a significant competitive advantage in the marketplace—especially since the banking industry has been slow to embrace the fintech revolution. “There is a lot of money going into fintech startups,” says Sanwal. “Investors see a massive industry where there has been a lot of incremental innovation but not a serious shift in how things are done. Banks are pretty terrible at innovation.” To Sanwal’s point, banks have incorporated new technologies like mobile into their distribution system, but the system itself hasn’t changed all that much. The branch is still the focal point for most banks.
A second group that has shown a great deal of interest in the fintech space is comprised of institutional investors who see consumer and small business loans as an attractive asset class in the current low interest rate environment, where the search for yield has forced them to broaden their horizons. “Fintech companies have developed a fundamentally less expensive way to originate loans while giving investors access to an asset class that they want,” says Dickinson.
It’s not surprising that fintech companies are very tough competitors in their product niches. Advances in technology have given them several very important advantages over traditional banks, including significantly lower costs, super-fast decisioning and simplicity. “At the end of the day, what the customer wants is a product they can understand at the lowest possible cost,” say Jeff Bogan, head of the institutional group at Lending Club, a marketplace lender that offers unsecured personal loans from $1,000 to $35,000 with three- or five-year terms, and more recently, unsecured business loans up to $300,000 with repayment terms between one to five years. One of the earliest fintech companies in the consumer loan sector—the San Francisco-based company launched its service in 2007—it has also been one of the most successful. Lending Club went public in 2014 and is listed on the New York Stock Exchange.
Bogan believes there are two components that have helped drive Lending Club’s success: operating cost efficiency and the customer experience. “I really think that is the core behind our growth and why we’ve been so successful,” he says. Lending Club has focused on providing a positive user experience built around its easy-to-use website, simple application process, transparency of loan terms and fees, and quick response time. Bogan contrasts Lending Club’s approach to that of most banks, which he says tend to offer “a clunky online user experience.” “That alone is a huge source of competitive advantage relative to the traditional banking system,” he adds.
Just offering a good user experience isn’t enough, and Lending Club also tries to exploit its significant cost advantage compared to most banks. One metric that the company uses to measure efficiency is operating expense as a percentage of its outstanding loan balance, which Bogan says is 2 percent and declining. Capital One Financial Corp.’s unsecured consumer loan business operates at 7 percent, according to Bogan. “The way we run our business, there’s substantial operating efficiency,” he says. “It’s really a combination of both of those elements that has driven the success of Lending Club today.”
This significant cost advantage is something that is common to the entire fintech space. “The cost of origination is a fraction of what it costs the banks,” says Ethan Teas, a managing director based in Australia at the consulting firm Novantas. “They have figured out how to keep costs super low.”
Prosper, also based in San Francisco, bills itself as the oldest peer-to-peer lender, having started operations in 2006. The company offers unsecured personal loans from $2,000 to $35,000, with repayment options of either three or five years. To date the company has made over $3 billion in loans, and derives its revenue from loan origination fees that it charges borrowers, and loan servicing fees that are paid by investors. CEO Aaron Vermut says that when banks scaled back their consumer lending during the financial crisis, it left high interest credit cards and payday lenders as the only loan options for many consumers. And one of Prosper’s goals, as Vermut puts it, was to “democratize credit.”
Like many fintech lenders, Prosper takes a broader approach to credit underwriting than most traditional banks, which tend to rely heavily on credit scores. Vermut says that Prosper uses credit scores as a “guardrail” to keep itself within certain parameters, but not to determine the final decision. The company’s underwriting process relies on over 400 data points including such factors as the applicant’s relationship with suppliers, shipping companies and credit card processors, e-commerce activity and cell phone records.
CAN Capital, a New York-based direct lender that offers up to $150,000 for business loans and merchant cash advances based on future credit card receivables, also takes other information into consideration during the underwriting process to identify those applicants that might have a lower-than-optimal credit score but have a track record of making good business decisions. “A credit score is a blunt instrument that is based more on personal credit than on business performance,” says CAN Capital CEO Daniel DeMeo.
The underwriting process at all of these fintech companies is driven by algorithms that can make quick decisions with little, if any, human intervention. CAN Capital’s approach is “faster, quicker and has a higher yes rate” than most banks, says DeMeo. “We can do our job in a day if we can get all of the information that we require.”
Given the vibrancy of the fintech sector and the vast amounts of investor funds that are pouring into it, how should traditional banks assess the competitive threat posed by the new upstarts? Unsecured credit, whether it’s to consumers or small businesses, is not a market that most banks—especially smaller community banks—are all that focused on these days. It would be difficult for them to offer a similar consumer or small business loan at a competitive price because their costs are too high. And this might explain why many banks view the fintech sector as something of a sideshow, a phenomenon that does not impact them directly since they are more interested in auto loans, first-lien home mortgages and home-equity loans—and on the business side—commercial real estate and commercial and industrial loans secured by collateral.
And yet there are two reasons why banks should pay close attention to what is happening in the fintech space. At a time when they are experiencing severe margin pressure due to low interest rates and intense competition for good commercial loans, banks should consider working with fintech lenders and see them as collaborators instead of competitors, particularly since most of them don’t have a good unsecured loan product of their own. And for their part, most of these fintech lenders—including Lending Club, Prosper and CAN Capital—would be happy to partner with banks and in effect become an outsourced loan origination platform, selling them the loan in return for a fee. The consumer and small business markets in the United States are massive and the banking industry serves only a relatively small part of it. Goldman Sachs—a high end Wall Street firm with a long roster of corporate clients throughout world—thinks so much of the opportunity that it plans to start a new online consumer lending business next year.
Some fintech lenders are already working closely with banks, including Lending Club. “You’ll find that the products that we’re very successful in are small balance loans where you need the data algorithm and significant scale to make the economics work,” explains Bogan. “So the banks that work with us today don’t have a great personal loan product because they can’t efficiently underwrite it and don’t understand it. Their approach is essentially, if you haven’t had a bankruptcy in the last few years and you have a 700 FICO score or greater, you’ll get a loan at 12.99 percent. That’s the extent of their sophistication in the personal loan business. We can bring significant value to them.” Lending Club, which doesn’t have a balance sheet, gets fees for originating and servicing the loan while the bank gets an earning asset with an attractive interest rate and quite possibly a new customer relationship.
There’s another reason why banks need to pay close attention to the fintech revolution. Technology is beginning to alter some of the basic economics of the lending business and to redefine the customer experience—and banks are being impacted by those changes. Kabbage CEO Rob Frohwein says that 95 percent of his company’s customers start and finish their loan application online with no human intervention. And Bogan says that the demographic makeup of Lending Club’s customer base is quite diverse. We tend to assume that fintech’s growth is driven by the entry of millennials into the economy as spenders and borrowers, and while there’s considerable truth behind that assumption, the acceptance of online financial services today is widespread. Bogan says that Lending Club originates loans across a broad cross section of the U.S. population. “We actually have very few 18 year olds because they don’t have the credit history necessary to get a loan,” he says. “And we probably have very few 70 year olds. If you look at our customer base, it’s really correlated with the general U.S. population.”
Even if they don’t partner with fintech companies, banks at least need to pay attention to how the technological innovations they are pioneering are changing their industry. They can’t afford to fall behind their fintech competitors in the innovation race. “Banks have processes and procedures that are very slow to change,” says Teas at Novantas. “And they look at what’s happening in financial technology and say it’s not big enough to be interesting. But when it does become big enough to be interesting, you’ve missed the boat.”
It goes without saying that community banks have had a tough time raising capital in this environment.
One exception is Oritani Financial Corp., a $2.6-billion asset holding company for Oritani Bank in New Jersey, which has raised a total of $413.6 million since 2010.
Kevin Lynch, the company’s chairman, president and CEO, said at Bank Director’s Acquire or Be Acquired conference in Phoenix, Arizona, last month that raising money was an intense marketing effort that required lots of preparation and a good business plan.
Lynch and the bank’s chief financial officer met with 30 institutional investors in four cities over the course of a week.
“The questions come at you like bullets and you’ve got to let them know you’re running the bank and you know what you’re doing,’’ he said. “Your potential investors are going to say ‘does this guy know what he’s talking about?’ You should be prepared to say who your customers are and what your delinquents are and what you’re going to do about them.”
He said investors are interested in knowing whether you can grow organically and how you will deploy the capital. Get to know the investors you are about to meet and learn what their goals are: is it a long term or short term investment for them?
Not all banks have had as good experience raising money as Oritani.
“Access to capital is critical,” said Stifel Nicolaus Weisel Executive Vice President and Vice Chairman Ben Plotkin, whose firm advised Oritani. “For banks trading well below book value, raising capital is a challenge.”
The problem is, a lot of banks are trading below book value. Banks with fewer than $1 billion in assets were trading on average at 72 percent to tangible book value as of mid-January, Plotkin said. That compared to about 120 percent price to tangible book value for banks with more than $1 billion in assets.
On average, larger banks have fewer balance sheet problems, and have had an easier time getting rid of problem loans.
Plotkin said investors are interested in banks with more than $1 billion in assets, with no looming balance sheet hole to plug, attractive demographics and ability to generate loan growth. They want a low level of non-performing assets, a loyal and low cost deposit base, and qualified management with a proven track record, he said.
Lynch also offered some other tips for raising money in the equity markets:
Have detailed knowledge of your portfolio and plans to build it
Know your largest loans and customers
Know all delinquent loans and how you are collecting on them
Know your asset quality levels, current market conditions and competition
Provide examples of lending and credit review practices
Know your loan pipeline and sources
Know how you will maintain credit quality while ramping up portfolio size