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General Investing

Profitability in Banking Is Key to Driving Shareholder Value

April 11, 2012

Northeast banks, on a relative basis, have been more profitable and have more of a capital cushion, which is going to be incremental in driving shareholder value in the near term, as investors need to shift away from a focus on growth and look more to profitability and capital management, says Collyn Gilbert, Managing Director, at Stifel, Nicolaus & Co., Inc.

“I think probably the biggest thing is the stability in the Northeast banks’ balance sheets. The overall profitability profile is actually pretty good,” she said. “And I think that is relevant as it ties into our view of the overall banking space, and that banking should be much more about profitability than about growth, because as we look at the industry, it’s deleveraging. Financial assets are shrinking.”

Gilbert likes Oritani Financial Corp. (ORIT), a niche, multifamily/commercial real estate lender in New Jersey, which recently converted to a thrift and has excess capital. She says to make money in the banks going forward, there needs to be a shift back to ROA, ROE, which essentially is what drives tangible book value, and then complement that with dividends.

“They’re growing nicely, they’re very profitable. They’ve got capital that they can put to work, either through increased dividends, buying back their stock, and they’re building a franchise,” Gilbert said. “I think that’s going to be desirable into what I think will be a consolidating market, all of this for a reasonable valuation in its shares.”

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