Cautious Optimism For Larger Regional Banks - Todd Hagerman - Collins Stewart, LLC
March 17, 2010 - The Wall Street Transcript has just published Pacific & Southwest Regional Banks Report offering a timely review of the Banking sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Todd Hagerman joined London-based Collins Stewart in June 2009 as the Head of U.S. regional bank research, following a similar role at Credit Suisse Securities (USA). Prior to joining Credit Suisse in 2007, Mr. Hagerman spent eight years as a Senior Banking Analyst at Fox-Pitt, Kelton in New York.
He also served more than a decade at the Federal Reserve Bank, where he fulfilled various roles in bank supervision and regulation at both the Federal Reserve Bank of New York and the Federal Reserve Bank of San Francisco. His work at the Fed included various management positions in bank surveillance and review, bank examinations, and policy and special studies. Mr. Hagerman holds a B.S. in finance and economics from the University of Arizona, and he earned his MBA at the Marshall School of Business at the University of Southern California.
TWST: Where are you focusing your attention in the Pacific and Southwest bank space? What do you cover?
Mr. Hagerman: For the moment, most of my attention is focused on certain smaller, regional banks in both of those geographies. Specifically, I am more focused on the Southern California region of the country, including my coverage of PacWest Bancorp (PACW), City National (CYN) and CVB Financial (CVBF).
TWST: How would you characterize the industry in general over the last six months?
Mr. Hagerman: For the most part, operating results have stabilized. However, we continue to see some differences among institutions in terms of the magnitude of credit deterioration, level of operating losses and prospects for a return to profitability. Unfortunately, many of these banks continue to operate at a loss and have yet to return to sustained profitability. But on the positive front, we are starting to see more tangible signs of stabilization within the credit quality metrics of these institutions.
TWST: What's your perspective on smaller banks outperforming larger banks? Have we seen that trend continue recently with news about potential regulation coming out of Washington?
Mr. Hagerman: Right. Well, there are a couple of reasons for that. One, most of your smaller banks do have more loan exposure tied to both traditional commercial loans as well as commercial real estate, as opposed to consumer assets. For most of the bigger banks, their loan portfolios are more heavily weighted toward consumer assets as opposed to commercial assets. Consumer assets to this point in the cycle have taken the bigger brunt in terms of the deterioration, coincident with higher unemployment levels and an economic recession. Smaller banks, for the most part, their primary problems have largely been contained within construction-related assets, largely tied to housing. But those concentrations have been far less relative to their large bank counterparts.
TWST: At the end of 2009, Morningstar wrote that smaller banks still represent one of the most undervalued areas of our banking universe, and that the potential for peaking consumer loan losses will definitely benefit these banks. However, the increase in commercial real estate losses could outweigh those benefits in the short run, depending on the product mix of each bank. What is your take on that?
Mr. Hagerman: I'd have to better define "smaller banks." We've become much more constructive on those banks that have a larger proportion of their loan mix in consumer assets. And as I mentioned before, with consumer assets either stabilizing or showing incremental improvement, I think that's the place where investors want to be if they have a penchant for bank stocks. Conversely, most of your smaller regional banks tend to be overweight commercial real estate assets. And in my opinion, it's still too early to be aggressively buying those shares. While they have certainly held up well, relatively speaking, to this point in the cycle, given the concerns we have for commercial real estate in the coming years as well as the stressed labor market, we still believe it's too early to be jumping in with both feet in terms of smaller regional banks.
TWST: And where do we go from here? What's your outlook for that sector?
Mr. Hagerman: We continue to believe that it's going to be a tough road, particularly in 2010, for the simple fact that many of these banks have yet to return to sustained profitability. And as we mentioned before, we don't see a return to sustained profitability prior to 2011. At the same time, many of your regional banks have yet to raise additional capital either to support the mix of assets they have or to exit TARP. So there's still a fair amount of capital-raising that is yet to come, which will certainly be fairly dilutive to shareholders. So for the time being, we're still relatively cautious on the sector for 2010. However, we are a little bit more constructive on some of your larger banks, which have in fact exited TARP, have raised additional capital and have stronger balance sheets with attractive valuations. The mid- and the small-cap regionals, however, we believe that it's still a bit early to become too aggressive on that sector.
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