A Long-Term Bullish View on Small Western Banks - Chris Stuplin - D.A. Davidson & Co.
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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Chris Stulpin, Vice President, Senior Research Analyst, joined D.A. Davidson & Co. in July 2007. Previously, Mr. Stulpin worked at Cohen & Company as a Bank Equity Analyst, where he focused mainly on banks located in New England and the mid-Atlantic states. Mr. Stulpin joins Jeff Rulis on D.A. Davidson's bank team, where he is focused on Asian-oriented and Southern California banks. He holds a bachelor's degree in accounting from the University of Pennsylvania.
TWST: Specifically where are you focusing your attention in the Southwest bank space?
Mr. Stulpin: We recently reassigned coverage within our banking team. I transferred my Pacific Northwest names and am currently focused on rounding out my coverage with Southwest names. A regional distinction between analysts makes sense. All of the companies I cover are headquartered in California, with the exception of Western Alliance (WAL), which is headquartered in Nevada but has subsidiaries throughout the Southwest.
TWST: How would you characterize the industry over the last six months or so? How have the banks in your coverage universe performed in comparison to banks in other regions?
Mr. Stulpin: In the past six months, we have been bumping along the bottom, and the bumps have tended to separate the winners from the losers. It has become more evident which banks will survive, and which banks will continue to flounder and possibly fail. I think the footprint that I cover has been more stressed than most other regions of the U.S., with the exceptions obviously of Florida and maybe Detroit. California, the sixth largest economy in the world, entered this cycle sooner than anybody else. So I think it's probably going to turn, if it's not already turning, before the majority of the other states or regions.
TWST: Are you seeing signs of that already?
Mr. Stulpin: I think so. I think housing prices have actually stabilized for the most part. Case-Shiller came out today and the biggest housing value gain was in San Francisco. That's somewhat of an anomaly because that's a very unique market, given its wealth and size, but still it shows strength. The Inland Empire and Central Valley are both regions I think have bottomed as well, and a lot of investors are coming in and trying to buy properties with cash.
TWST: Are you concerned about the government situation in California?
Mr. Stulpin: I thoroughly inquired into that situation. It's something to keep my eye on. I don't feel default is a threat to any bank's balance sheet at this time. The probability of default is less than what many are people are saying.
TWST: Smaller banks have outperformed larger banks, something we've observed with the latest murmurs about regulatory issues coming out of Washington. What's generally your perspective on this?
Mr. Stulpin: I think they got beat up a little bit harder, or a little more severely, than the larger institutions. I think the Street wisdom was that the government will back the large institutions and there was less likelihood of failure for them, and the smaller guys were secondary. And accordingly, there was a higher risk of failure for smaller institutions; that was reflected in the stock prices. And whenever people started to dig a little deeper and realized that smaller-cap banks were at tremendous values, as their stock price was not representing the true value of the company, they materially appreciated.
TWST: It's been a pretty good run-up closing out last year and then starting this year.
Mr. Stulpin: It was. A lot of it could be attributed to situations such as East West (EWBC), for instance, when it took over UCB via FDIC. The stock was up 55% from Friday, when it was announced to Monday. Also a lot of the upside was driven by a little more optimism that the financial system would survive; it was on the cusp of failure. We're out of the abyss, so I think that's also reflected in some of the appreciation in the sector.
TWST: In 2009 a story on Morningstar said smaller banks still represent one of the most undervalued areas of our banking universe. What's your take on that?
Mr. Stulpin: I totally agree. I think a year or five from now, some of us will look back at these valuations and kick ourselves for not becoming more involved. I really think that's the case. Community banks are the drivers of middle-market lending. I think I previously mentioned that California is roughly the sixth largest economy in the world. Whenever the economy comes back, and business returns and commerce returns, banks are going to be lending to small businesses. And I think there is tremendous upside.
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