Senior Analyst With Sterne, Agee And Leach Picks Top Regional Bank Winners And Talks Consolidation In The Sector
March 18, 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.
View Details of This Special Report
Recent Wall Street Transcript Special Reports.
Edward Timmons joined Sterne, Agee & Leach in May 2008 as a Senior Research Analyst covering mid-cap banks. Prior to joining the firm, he was an Associate Analyst at Stifel, Nicolaus & Co., for which he covered regional banks and thrifts. Mr. Timmons has also held various positions with JPMorgan Chase and Putnam Investments. He received his undergraduate degree in finance from West Virginia University and earned his MBA from the College of William & Mary.
TWST: What's your outlook for the industry and for Western regional banks specifically?
Mr. Timmons: I think 2010 will be a difficult year. I think credit costs will remain somewhat elevated. My expectation of interest rates is it may be a fourth-quarter event when we get the first turn. So I think you're going to see the top line - without any kind of benefit to the margin and very little loan growth - I think you'll see the top line remain depressed, perhaps falling at a lot of these banks. And as I mentioned, credit costs will remain high. Bottom line: You're not going to see a whole lot of earnings growth in 2010, although you are coming off a pretty weak 2009. So year-over-year, you will probably see a modest move up.
Longer term, I think profitability coming out of the cycle will be much less than it was coming into the cycle. I mentioned you're going to have higher capital levels, higher reserve levels, higher FDIC premiums, a number of negative headwinds. But the flip side is you have an improved lending environment; you have a lot of the irrational competitors gone, either through failure or just exiting the market. So bigger picture, I think near term will remain challenging, intermediate term get somewhat better and longer term clearly improved, but not back to where we were in 2006 and 2007.
TWST: Do you expect to see a lot of consolidation?
Mr. Timmons: I think the FDIC consolidation will continue for another year or two. There are a couple hundred banks still out there that either need to be failed or are teetering at this point. I don't see traditional M And A coming back until that cycle kind of plays out. Banks are reluctant to pay a premium when they can get the FDIC to pay them to acquire another bank. But coming out of the cycle, I think there are going to be lot of management teams and a lot of boards that have just had enough, and may be looking to exit. And with valuations improved somewhat, they'll probably look to sell the bank. I think with the capital raises that we've had, there are a number of acquirers kind of ready and willing to play the acquisition game.
TWST: How do you see the FDIC process working out?
Mr. Timmons: As we move forward, the bidding process becomes increasingly more competitive, and the acquisitions are less beneficial to the acquirers. I think those that are interested in banks and those that can do the deals will continue to look at deals, continue to bid on them. And the market will continue to reward the banks that do win the bids. But my expectation is they will be much less favorable going forward.
TWST: Where are you pointing investors now? Do you see any good stories out there?
Mr. Timmons: I do. I think there are a number of good stories. PacWest (PACW) has been one of my favorite names. I upgraded that last fall. I continue to think that they will be an active consolidator through the FDIC. They have a ton of capital and strong pre-provision earnings power, so they give me the comfort level that they will get through this current cycle and continue to build a franchise through these FDIC deals. On a normalized earnings basis, I think the valuation looks pretty attractive here. CoBiz, out in Colorado, in 2009 they were very aggressive in addressing a lot of their credit issues, took the lumps, built reserves to a point where I think they hit an inflection point in credit much earlier than many other banks. So I think 2011 could be a kind of return to normalcy for those guys.
And on a normalized earnings basis, I think they look attractive.There are a number of banks at the right price; I like them longer term. But at this point, just given the run we've had year to date, I'm just not comfortable jumping in. Lastly, Silicon Valley - if you're looking for a pure-play on a turn in the economy and increasing rates - given their lack of real state exposure, I really like that bank. They have significant earnings leverage once rates turn and move up a couple of hundred basis points. But my expectation is that's fourth quarter 2010 or maybe an early 2011 event.
The remainder of this 37 page Pacific & Southwest Regional 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 Special Issue 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