M And A Activity, Staff Additions, And Activist Investors Are Top Trends In The Banking Space, Says Senior Analyst At Sterne Agee; Find Out How He Feels They Will Play Out In 2012 In This Exclusive Interview
January 13, 2012 - The Wall Street Transcript has just published Northeast and Mid-Atlantic 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.
Recent Wall Street Transcript Special Reports.
Matthew Kelley, a Managing Director, joined Sterne Agee & Leach, Inc., as a Senior Research Analyst focusing on Northeast banks and thrifts in February 2006 after working as an Analyst at Moors & Cabot since 2002.Previously, he covered banks and thrifts for RBC Capital Markets and Tucker Anthony - acquired by the Royal Bank of Canada in 2001. Mr. Kelley holds a B.S. in finance from Marquette University and is a Member of the BancAnalysts Association of Boston. Mike Shafir is a Senior Research Analyst at Sterne Agee & Leach, Inc. He joined the firm as a Research Analyst, focusing on Northeast banks and thrifts, in April 2006 after working as an Analyst at Moors & Cabot since 2004. Mr. Shafir holds a B.A. in history from Brandeis University and an MBA in finance from Rutgers Business School.
TWST: Where do you focus your attention in the Northeast and Mid-Atlantic bank space these days?
Mr. Kelley: There are a couple of big themes that we believe will continue to drive performance in this space. Number one, we are looking at companies that have high levels of excess capital that they intend to return to shareholders through organic growth, share buybacks and dividends. The share buyback piece is definitely an important part of the equation. There are a lot of larger-cap companies that are building capital but are severely restricted by their regulators as to what they can return to shareholders in the form of buybacks. If you look down the market-cap chain, you find a lot of names that we find attractive, banks we believe will be able to buy back stock in more significant amounts.Theme number two is pockets of growth. We think the New England economy performs better than the Mid-Atlantic in our entire Northeast Corridor marketplace. We're looking at companies that are acquiring and picking up people and lending teams.
We think staff additions are going to be an important part of the growth story for a lot of smaller-cap banks that are taking market share from midsize and larger-cap players. And then M&A. M&A has been dormant throughout most of the country, but in the Northeast we've actually seen some activity - most importantly, we've seen some healthy banks electing to sell. We think that multiples have to come down a little bit, and the expectations of the sellers have to be drawn down to more realistic levels, but we think we'll see more deal activity in 2012 than we saw in 2011. The Northeast, we think, will have the most significant amount of M&A activity, particularly those of healthy bank sellers compared to other regions of the country. Another factor would be that, of the transactions that have occurred over the last couple of years, activist investors have played an important role. Those are four factors that we think are positive catalysts for the stocks.
On the opposite side of the ledger in terms of concerns, we have some companies that are continuing to struggle with late-stage credit challenges, and a residential market that is very slow to recover in the Northeast. One unique challenge is that the foreclosure cycle is incredibly long compared to national averages. A lot of the larger single-family-focused residential lenders are facing a backlog of properties that they're attempting to foreclose on, and are struggling to get those through that pipeline. And then, lot of companies in our universe are transitioning from the Office of Thrift Supervision to the OCC. The OTS was written out of existence under Dodd-Frank. We think there are unique regulatory challenges there. A big challenge for banks is going to be navigating a sustained low-interest-rate environment, and we believe there are a bunch of companies that are poorly positioned for that. Finally, we're looking at some of the M&A trends. In 2010 and 2011, the buyers' stocks did not respond favorably at deal announcement. But we think that is potentially starting to change. There is one transaction that we would highlight that was announced recently, which we think illustrates the potential inflection point in how investors are perceiving the buyers. Those are the big picture trends that Mike and I are looking at in terms of positive and negative catalysts.
Mr. Shafir: In terms of the challenges that Matt mentioned, I would say those are challenges that are not just in the Northeast. Some of them are a little bit more Northeast specific in terms of the transition to the OCC, because Matt and I have a heavy thrift coverage list. But other than that, I think a lot of the regulatory issues and the low-rate environment are going to affect banks in all parts of the country as well.
TWST: When you talk about these pockets of growth, are there unifying characteristics among the growing banks?
Mr. Kelley: Number one, the New England economy overall is performing much better than the national averages and much better than the Northeast overall. Unemployment is in the 6% to 7% range, versus the national rate, just below 9%. In the Boston market, inside of the 495 loop, you've got a lot of activity in the education and health care space that is driving some better commercial real estate metrics. In the western Pennsylvania market, you have the impact of the Marcellus Shale, the natural gas exploration opportunity that we think will, over time, have some benefits for certainly that local economy and banks in that market.
In the mortgage market, you're seeing the shadow banking system continue to be unwound, and a lot of that market share is returning to community and regional banks that are originating mortgages and selling them into the secondary markets. That's been a strong subsector of growth. The multifamily lending space is one where a lot of the institutions that we focus on have been able to gain some share and actually put up some decent loan growth. Those are the types of asset classes and regions that we see kind of those pockets of growth in.
TWST: About a year ago, we talked a quite a bit about the demutualization space. What's happening there at this point and going forward?
Mr. Shafir: Part of the reason why we had such an in-depth discussion on the demutualization space last year was that the transition out of the OTS into the OCC potentially effected some of the regulations around that conversion space. A year later, I think we've come to the realization that a lot of those restrictions - specifically on repurchasing stock before the one-year anniversary after a conversion, and also the three-year moratorium on sale - have now been upheld.
Those restrictions have remained in place. And furthermore, I would say that a lot of the larger institutions who had operated in that structure are now fully public. If we think about companies with size, there are really only three or four left; Third Federal (TFSL) is the largest mutual holding company in the country, at $11 billion or so in assets, in Cleveland, Ohio. We have Meridian Interstate, right outside of Boston. Investors Bancorp (ISBC) is another sizable institution in New Jersey, at $10-billion-plus in assets, which is probably nearing an announcement. And then Beneficial (BNCL), which is in Philadelphia. We're really talking about four companies left that operate in that structure, which would have institutional appeal from a size standpoint.
TWST: You mentioned that you have seen some transactions involving healthy banks. Are some of the people on your list described as healthy?
The remainder of this 36 page Northeast and Mid-Atlantic Banks Report can be immediately viewed by purchasing online.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Northeast and Mid-Atlantic Banks Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673