Banks with Quality Relationships to Harvest Loan Growth - Damon DelMonte - Keefe, Bruyette And Woods, Inc.
April 11, 2012 - The Wall Street Transcript has just published S&Ls, Investment Banks and Asset Management Report offering a timely review of the 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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Damon DelMonte is a Senior Vice President of Equity Research at Keefe, Bruyette & Woods, Inc., where he covers regional banks and is based in the firm's Hartford, Conn., office. Prior to joining KBW in 2003, Mr. DelMonte received an MBA in finance from the University of Connecticut and a B.S. in finance from Bryant University.
TWST: Your coverage of regional banking is very broad. What are the top trends investors can expect to emerge or develop in 2012?
Mr. DelMonte: One trend we're closely watching is loan growth. I know a lot of effort has been put forth by the government to try to jump-start the economy, and we're looking for positive signs that banks are seeing and increasing lending trends. For now, we're starting to see some signs of that, but we're cautiously optimistic that we'll continue to see an increase in lending activity throughout the year and as we progress into 2013.
TWST: Some analysts say even qualified borrowers don't have the appetite to take out new loans yet. Do you observe that trend? Are there certain types of loans experiencing better growth than others, perhaps creating some pockets of opportunity for your banks?
Mr. DelMonte: I think the deleveraging process is continuing, so the demand for new loans is just not there yet. What we're seeing is, and I think this is very much the situation in the Northeast, that the larger banks continue to shy away from different areas of the markets. They are not out there providing credit, and in some cases they've lost touch with some of their smaller customers. As a result, what they have done is provide a great opportunity for the small and midsized banks to come in and take market share. I guess if you want to characterize this, you could say the pie is not getting any bigger, but the smaller players are stealing larger slices of that pie. While the economy continues to be on the mend, the desire for new loans is still not there yet. And as I've said, smaller banks have had success taking market share from larger players. We are just not seeing new customers coming on or existing customers looking to draw down on existing lines or looking to initiate new projects, new investments in their businesses. As far as where we're seeing the growth come from, it tends to be more on the commercial side, both C&I and commercial real estate.
TWST: How is credit quality trending across your group at this point?
Mr. DelMonte: The Northeast is very unique when it comes to credit quality when we look back to the financial crisis. We did not have the boom and the bust part of the cycle, for a lack of a better term. What we saw in New England and Upstate New York, in particular, was measured growth as it continued to stay on pace with demand for new homes, whereas other areas of the country - Southeast, Southwest or the West - you had massive development projects. In the Northeast, supply and demand were kind of like lockstep - the demand was there, so the supply became available. That's not to say there wasn't a pullback in home prices and there was no foreclosure activity. The Northeast definitely experienced its share of a housing crisis, just not to the depths of other areas of the country. Another important aspect of why credit has held up better deals with the fact that the community banks didn't offer the exotic mortgage products; instead, they stuck to their conservative lending practices of offering traditional mortgages. In many cases, foreclosures that occurred across the Northeast were because of riskier types of loans underwritten by national lenders, not by local lenders. So from a credit quality perspective you haven't seen the depths of the credit crisis having a full impact on the Northeast names. By and large, credit has been much more tolerable, much more benign, you could say, than other areas of the country.
As a result, I think the Northeast banks have performed better as a group from an overall return performance perspective. Also important to note, with more stable credit quality trends, there were obviously fewer losses that were realized by the banks. This helped to preserve capital levels so you didn't see the same amount of scrutiny on capital in the Northeast as you did elsewhere. You have a lot of other banks around the country that either failed or were brought to the brink of failure because of mounting credit losses and shrinking capital levels, so they needed to go out and find a lifeline to remain a viable company. In many cases those banks failed, but in the Northeast we saw banks not come under the same kind of pressures, and we felt banks were actually offensive with capital raises, building capital in order to take advantage of opportunities throughout the marketplace.
TWST: Since your coverage is really broad, would you give us two to three stocks that you think are the best way to get exposure to the sector at this point in time?
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