bank investors: who were they, who are they and what are they
TRANSCRIPT
Bank Investors: Who Were They, Who Are They and What Are They Looking For
Lisa Schultz Managing Director, Equity Capital Markets & Syndicate, U.S.,
Stifel Nicolaus Weisel
11:30 AM - 12:20 AM
Anton Schutz President & Chief Investment Officer, Mendon Capital Advisors
Corporation and Founder, New Ground Capital
On Demand Passcode: CAMELBACK Twitter Hashtag: #AOBA13 Wireless Passcode: AOBA2013
I. Evolution of the Bank Market
II. What Investors Are Currently Looking For
III. Bank Investors Today
IV. Shareholder Activism
V. Positioning For The Future
Presentation Outline
Stifel, Nicolaus & Company, Incorporated and Thomas Weisel Partners LLC are affiliated broker-dealer subsidiaries of Stifel Financial Corp. which are collectively referred to herein under the marketing name Stifel Nicolaus Weisel, representing the firm’s investment banking services. This document has been prepared by the investment banking division and is not a product of Stifel Research. The information and statistical data contained herein have been obtained from sources that Stifel Nicolaus Weisel believes are reliable, but Stifel Nicolaus Weisel makes no representation or warranty as to the accuracy or completeness of any such information or data and expressly disclaims any and all liability relating to or resulting from your use of these materials. The information and data contained herein are current only as of the date(s) indicated, and Stifel Nicolaus Weisel has no intention, obligation, or duty to update these materials after such date(s). These materials do not constitute an offer to sell or the solicitation of an offer to buy any securities. Stifel Nicolaus may be a market-maker in certain of these securities, and Stifel Nicolaus Weisel may have provided investment banking services to certain of the companies listed herein. Stifel Nicolaus, Thomas Weisel Partners, and/or their respective officers, directors, employees, and affiliates may at any time hold a long or short position in any of these securities and may from time-to-time purchase or sell such securities. These materials may not be distributed without Stifel Nicolaus Weisel’s prior written consent. Copyright 2013 Stifel, Nicolaus & Company, Incorporated
I. Evolution of the Bank Market
$6,884
$14,290
$4,538
$10,537
$0$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000
1999 CurrentTotal Assets ($B) Total Deposits ($B)
4
Source: Institution totals from FDIC data, total assets and deposits as of 9/30/2012. Market data from SNL Financial.
*Public banks include institutions listed on the NASDAQ, NYSE, Pink Sheets and OTC Bulletin Board.
Summary of Banks in 1999 and Today
Changes in the Banking Landscape
# of Banks Total Assets and Deposits ($B)
# of Public Banks* Total Market Cap. ($B)
1,2381,088
0
200
400
600
800
1,000
1,200
1,400
1999 Current
12% Decrease$1,140
$1,077
$0
$200
$400
$600
$800
$1,000
$1,200
1999 Current
Median Market
Cap.$47 M
Median Market
Cap.$34 M
6% Decrease
% Increase Assets 108% Deposits 132%
10,222
7,121
0
2,000
4,000
6,000
8,000
10,000
12,000
1999 Current
30% Decrease
5
Bank Sector Performance Comparison
5
Source: SNL Financial. Market data as of 12/31/2012. *KBW Regional performance data is unavailable prior to 7/25/2005.
S&P 500 SNL Bank KBW Bank KBW Regional*
2001 (13.0%) (1.2%) (4.6%)
2002 (23.4%) (11.5%) (13.0%)
2003 26.4% 30.9% 30.3%
2004 9.0% 8.5% 6.8%
2005 3.0% (2.1%) (0.3%) (4.2%)
2006 13.6% 13.0% 13.2% 5.6%
2007 3.5% (25.2%) (24.6%) (24.4%)
2008 (38.5%) (45.6%) (50.0%) (21.7%)
2009 23.5% (2.8%) (3.6%) (24.2%)
2010 12.8% 11.2% 22.2% 18.2%
2011 (0.0%) (23.7%) (24.6%) (7.1%)
2012 13.4% 32.3% 30.2% 10.5%
2001 - Present 8.0% (39.0%) (43.1%) (45.0%)
Changes in the banking landscape continue to drive investors into more liquid names
Reasons for underperformance:
o Community banks: Loss on commercial real estate
and construction loans
Higher expense base
Required to hold more capital
o Large banks: Concerns over mortgage
litigation risk
Impact of Dodd-Frank & Volcker Rule on fee income and non-banking business lines
6
Ownership in Mid & Large Cap Banks
Source: SNL Financial, Factset. 2012 as of reported filings for 9/30/2012.
Over $1.0 Billion
Market Cap. Historical Ownership / Shares Outstanding
1% 2% 2% 2% 2% 2% 2% 2% 2% 3% 3% 3% 3%
31%35%
43%48% 47% 50% 54%
61%67% 69% 74% 71% 73%
68%63%
56%50% 51% 48% 44%
36%30% 28%
24% 26% 24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Insider Institutional Retail
7
Ownership in Small Cap Banks
Market Cap.
$250 Million to
$1.0 Billion
Historical Ownership / Shares Outstanding
2% 3% 4% 4% 6% 6% 6% 7% 7% 7% 7% 9% 9%11% 13%
19% 22%25% 27%
32%39% 40% 43%
48%52%
56%
87% 84%77% 74%
69% 67%62%
54% 53% 50%45%
39% 34%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Insider Institutional Retail
Source: SNL Financial, Factset. 2012 as of reported filings for 9/30/2012.
8
Ownership in Micro Cap Banks
Market Cap.
$50 Million to
$250 Million
Historical Ownership / Shares Outstanding
6% 7% 6% 8% 8% 8% 9% 10% 11% 11% 12% 15% 16%2% 3% 6%9% 9% 11%
14% 12% 13% 12% 14%17%
21%
92% 90% 88% 83% 83% 81% 77% 78% 75% 77% 74%68% 63%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Insider Institutional Retail
Source: SNL Financial, Factset. 2012 as of reported filings for 9/30/2012.
9
Institutional Ownership Analysis – Then and Now
Source: SNL Financial, Factset.
Holdings of Top 10 Investors by Fund Type – 12/31/1999 Holdings of Top 10 Investors by Fund Type – Current
Top 10 Holders of the KBW Regional Bank Index
30%
70%
Discretionary Non-Discretionary
28%
72%
Discretionary Non-Discretionary
1999 $921 Million
Assets Held by Discretionary Funds:
Current $6.3 Billion
10
Institutional Ownership Analysis – Then and Now
Top 10 Institutional Investors in the KBW Regional Bank Index – 12/31/1999
Top 10 Institutional Investors in the KBW Regional Bank Index – Current
Source: SNL Financial, Factset. Discretionary investors highlighted in grey.
Rank Institutional Investor
Market Value
($MMs)1 BlackRock Fund Advisors $831
2 Fidelity Management & Research Co. $320
3 Wellington Management Co. LLP $311
4 State Street Global Advisors $305
5 Putnam Investment Management LLC $290
6 The Vanguard Group, Inc. $290
7 TIAA-CREF Asset Management LLC $262
8 Deutsche Bank Investment Management, Inc. $238
9 Dimensional Fund Advisors, Inc. $221
10 Mellon Capital Management Corp. $216
Total $3,283
Rank Institutional Investor
Market Value
($MMs)1 BlackRock Fund Advisors $4,741
2 Vanguard Group Inc. $3,960
3 State Street Global Advisors Inc. $3,179
4 Fidelity Management & Research Co. $1,951
5 Dimensional Fund Advisors LP $1,764
6 T. Rowe Price Associates Inc. $1,550
7 Northern Trust Global Investments Ltd. $1,215
8 Lord Abbett & Co. LLC $1,029
9 Wellington Management Co. LLP $883
10 Columbia Wanger Asset Management LLC $874
Total $21,146
11
BlackRock Fund Advisors TIAA-CREF JPMorgan Asset
Management The Banc Funds Co.
Fidelity Management AllianceBernstein Putnam Investment Mgmt. Deutsche Bank Investment
Management Columbia Management
Investor Movement Since the Beginning of 2000
KBW Bank Index
KBW Regional
Bank Index
Buying Maintaining Selling
Vanguard Group State Street Wellington Management T. Rowe Price Dodge & Cox Invesco Advisors Capital World Investors Sandler Asset Management BlackRock Fund Advisors Vanguard Group State Street Fidelity Management Dimensional Fund Advisors T. Rowe Price Lord Abbett Sandler Asset Management
Wellington Management TIAA-CREF The Banc Funds Co.
Deutsche Bank Investment Management
Putnam Investment Mgmt. Mellon Capital
Source: FactSet.
Dedicated Bank Stock Investors
That Have Gone Away
Tontine Asset Management Synovus Asset Management Keefe Managers
12
Public Float Soaked Up by Index Funds
Bank ownership trends mirror those of the broader market in the sense that more money is being managed through non-discretionary funds (ETFs and passively managed index funds)
ETFs and Index Funds have grown in popularity as investors look for lower cost investment alternatives in a stock market that has been relatively unchanged since the beginning of 2000. Contributing to this phenomenon have been:
High levels of stock market volatility, including the 2009 “flash crash”
Underperformance by some of the higher profile active managers (Bill Miller and others)
Access, liquidity and specialization of ETFs relative to traditional mutual funds
Current liquidity in bank stocks is diminished as public float is further reduced by shares held by index funds
Price/valuation impacted by a higher liquidity discount applied by investors
Changes in stock ownership impacted more and more by computers/models, not fundamental valuation techniques applied by real-life portfolio managers, which on occasion leads to over-corrections based on technical indicators
13
Source: SNL Financial. Small Cap defined as banks with market capitalization less than $1 billion. Mid & Large Cap defined as banks with market capitalization over $1 billion.
*Exchange traded banks defined as banks listed on the NYSE or NASDAQ. Excludes merger targets.
Composition of Publicly Traded Banks
Current Banking Universe
Small Cap Mid & Lg. Cap
# of Exchange Traded Banks* 362 75
Total Assets ($M) $624,217 $11,188,750
Median Assets ($000) $1,118,361 $17,018,592
Total Market Cap. ($M) $70,430 $983,492
Median Market Cap ($M) $98 $1,987
Public Banks by Region: Northeast – 34 Midatlantic – 93 Southeast – 84 Southwest – 15 Midwest – 87 West – 49
Source: SNL Financial; as of 12/31/2012.
29
8
9
Public Banks Per State
0 1-4 5-9 10-14 15 +
Current Banking Universe – Small Cap Banks
18
11
6
11
15
24 8
19
26
25
11
14
8
17
8
5
30
8 5
5
5
9
Public Banks by Region: Northeast – 3 Midatlantic – 16 Southeast – 15 Southwest – 10 Midwest – 17 West – 14
Source: SNL Financial; as of 12/31/2012.
Public Banks Per State
0 1-4 5-9 10-14 15 +
Current Banking Universe – Mid & Large Cap Banks
15
9
8
6
6
1
5 4
1
2
3
2
II. What Investors Are Currently Looking For
17
Shift in Banking Environment = New Investor Expectations
While Primarily Focused on Banks and Thrifts, We Seek Attractive Investment
Opportunities Across the Broad Spectrum of Financial Institutions
Various Types of Opportunities Deserve Special Focus:
Long-Term Consolidation Driven Identify Potential Targets and Acquirors Thrift Conversions
Shorter-Term Catalyst Driven
FDIC Assisted IPOs/Capital Raises Earnings Expectations vs. Results Buyback
Always Concentrate on Intensive Fundamental Research of Investment Ideas with an
Understanding of Technical Factors that Affect Trading
18
Three-Step Discipline:
Idea Generation •Daily review for
valuation anomalies
•Map and model M&A possibilities
•Analyst road trips: several per year per analyst
• Industry conferences throughout the year
• In-house management visits
•Daily industry news
•Filter sell-side ideas, IPOs, capital offerings
Investment Decision •Analyst presents idea
and thesis to PM and Head Trader
•Team discussions to ensure all key factors known and analyzed
•PM makes final call; analysts have discretion in PM’s absence
Position Monitoring •Analyst maintains
responsibility for investment thesis
•Monitor daily changes in price and volume; news updates
•Regular discussions with company management
•Special focus around earnings releases, 10-Q releases and headline news
Investment Process
19
Sub Sectors
With the Vast Breadth of the Financial Services Sector, Opportunities Abound in Any Economic, Credit or Rate Environment
20
Valuation Dynamics
Value Management
-Experience -Insider ownership -Age of chairman/CEO -Attitude regarding growth
Geography -Market growth -Industries served -Competition -Growth vs. peers
Credit -Lending history -Portfolio diversification -Aggressive/ conservative -Adequacy of reserves
Balance Sheet -Interest-rate risk -Deposit/loan composition -Debt/equity -Flexibility
Capital -History of capital stewardship -Excess? -Adequate?
Valuation -Versus geographic peers -Price/tangible book -Core deposit premium -P/E ratio
Propensity for M&A -Willingness to acquire or be acquired -Management’s prior M&A history
Deal activity, advantageous to buyer and seller, will accelerate over next two to five years due to:
Regulatory headwinds
Dodd-Frank Act TARP exit
Lack of significant revenue growth Weak loan demand Reduced fee income
Capital constraints Capital markets mostly shut to smaller banks
“Tired” management teams and boards of directors Improved valuations & market conditions
21
Consolidation Dynamics
22
Drivers of M&A are in Place
Operating “fatigue” due to current credit, economic and regulatory environment likely to accelerate consolidation in the industry
Scale becomes more important given revenue pressures and higher levels of fixed costs
An average of 230 depository institutions sold per year since 2000
211 260 270 271 296 288 143 118 178 152 228
188% 216% 225% 229% 244% 230%
170%
114% 120% 106% 118%
0
50
100
150
200
250
300
350
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of Deals Average Deal Value/ Tangible Book Value(%)
Industry Consolidation in Community Banking Sector
23
Community Bank Returns
12%
85% 73%
24%
(100%)
(50%)
0%
50%
100%
150%
200%
250%
300%
12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11
SNL Mid Cap U.S. Bank & Thrift Total Return SNL Micro Cap U.S. Bank & Thrift Total Return
SNL Small Cap U.S. Bank & Thrift Total Return S&P 500 Total Return
24
Illustrative Model – Bank XYZ*
Pre-Crisis "New Normal"
TCE / TA 6.00% 8.00%
ROAA 1.25% 1.00%
Asset Growth 6.0% 3.0%
Implied Forward P / E
11.5x 9.3x
Implied P / TBV
253% 120%
253%
120%
Pre - Crisis "New Normal"
What Will the “New Normal” Look Like?
*See Appendix for approach and assumptions.
III. Bank Investors Today
26
Traditional Mutual Funds Private Equity Funds Hedge Funds
Shortest required holding period with daily redemption
Investments are typically sized as a percentage of the fund, creating minimum size limitations for positions in small cap banks
Most diversified
Focus is typically on fundamentals
Almost always long only
Investors expect modest returns
Longer holding period, typically quarterly redemptions
Investors expect large returns
Oftentimes focus is on fewer core investments than a typical mutual fund
Generally shorter term investment horizon relative to mutual funds
Focus is typically less on fundamentals
Usually can adopt long or short strategy
Longest holding period and investment horizon (typically 3-5 years)
Tend to take significant positions, but given ownership limits in banks, size restrictions may cap investment
Less diversified with concentration in a small basket of key investments
Focused on IRR (typically 25-30%) and cash on cash return multiples
Types of Institutional Investors
27
Largest Holders By Number Of Banks Held Largest Holders By Dollar Value of Position
Source: FactSet LionShares, as of reported filings for 9/30/12. Note: Includes top 100 banks by market capitalization under Keefe, Bruyette & Woods Research Coverage with market capitalization under $1 billion. Top 10 excludes non-discretionary funds and investors with fewer than 10 positions. Green arrow indicates investor moved up in ranking from 2011. Red arrow indicates investor moved down in ranking from 2011.
Largest Institutional Investors In Small Cap Banks – Q3 ’12 Trends
1) BlackRock Advisors LLC 2) AllianceBernstein LP 3) Columbia Management Investment Advisers LLC 4) SunAmerica Asset Management Corp. 5) Aberdeen Asset Management, Inc. 6) Principal Global Investors LLC 7) Manulife Asset Management (United States) LLC 8) JPMorgan Investment Management, Inc. 9) UBS Global Asset Management 10) Goldman Sachs Asset Management International Ltd.
1) Wellington Management Co. LLP 2) Columbia Management Investment Advisers LLC 3) Fidelity Management & Research Co. 4) The Banc Funds Co. LLC 5) Lord, Abbett & Co. LLC 6) T. Rowe Price Associates, Inc. 7) Manulife Asset Management (United States) LLC 8) BlackRock Advisors LLC 9) Goldman Sachs Asset Management LP 10) JPMorgan Investment Management, Inc.
Dollar Value of Position by Fund Type Number of Banks Held by Fund Type
54%46%
Discretionary Non-Discretionary
38%
62%
Discretionary Non-Discretionary
1) Columbia Management Investment Advisers LLC 2) BlackRock Advisors LLC 3) AllianceBernstein LP 4) UBS Global Asset Management 5) Teacher Retirement System of Texas 6) SunAmerica Asset Management Corp. 7) T. Rowe Price Associates, Inc. 8) Goldman Sachs Asset Management LP 9) Aberdeen Asset Management, Inc. 10) Managed Account Advisors LLC
28
Largest Holders By Number Of Banks Held Largest Holders By Dollar Value of Position
Source: FactSet LionShares, as of reported filings for 9/30/12. Note: Includes 69 banks under Keefe, Bruyette & Woods Research Coverage with market capitalization over $1 billion. Top 10 excludes non-discretionary funds and investors with fewer than 10 positions. Green arrow indicates investor moved up in ranking from 2011. Red arrow indicates investor moved down in ranking from 2011.
1) Fidelity Management & Research Co. 2) Wellington Management Co. LLP 3) Capital Research & Management Co. 4) T. Rowe Price Associates, Inc. 5) BlackRock Advisors LLC 6) JPMorgan Investment Management, Inc. 7) Columbia Management Investment Advisers LLC 8) Barrow, Hanley, Mewhinney & Strauss LLC 9) AllianceBernstein LP 10) MFS Investment Management, Inc. Dollar Value of Position by Fund Type Number of Banks Held by Fund Type
59%41%
Discretionary Non-Discretionary
69%
31%
Discretionary Non-Discretionary
Largest Institutional Investors In Mid & Large Cap Banks – Q3 ’12 Trends
29 Source: FactSet as of 9/30/12 filings.
Institutional Investors Are Market Weighted In Bank Stocks
Financial Sector
Institutional Portfolio Weight
S&P 500 Index
Weight Overweight / Underweight
Consumer Finance 0.32% 0.26% 0.06%
Commercial Banks 2.86% 2.71% 0.15%
Diversified Financial Services 2.53% 2.76% (0.24%)
Thrifts / Mortgage Finance 0.06% 0.06% (0.01%)
Capital Markets 1.12% 1.04% 0.08%
Total: All Banks 6.88% 6.84% 0.04%
30
Who is Currently Overweight Financials?
Source: SNL Financial, Factset, Bloomberg. *At 12/31/2012, as provided by Standard & Poor’s.
Northern Trust Global Investments Ltd. – 12.5% Dimensional Fund Advisors LP – 10.4% Norges Bank Investment Management – 8.7% Lord Abbett & Co. LLC – 7.8% NFJ Investment Group LLC – 6.4% JPMorgan Asset Management – 6.1% BlackRock Fund Advisors – 6.0% Vanguard Group Inc. – 5.9% AllianceBernstein Holding LP – 5.5% Capital World Investors – 5.3% TIAA-CREF Asset Management LLC – 5.2% Wellington Management Co. LLP – 5.1% BlackRock Advisors LLC – 4.8% Columbia Management Investment Advisers LLC – 4.6% State Street Global Advisors Inc. – 4.5% Goldman Sachs Asset Management L.P. – 4.5% Columbia Wanger Asset Management LLC – 4.2% Fidelity Management & Research Co. – 4.0% T. Rowe Price Associates Inc. – 3.7% Neuberger Berman LLC – 2.1%
Banks Comprise 2.8% of the S&P 500*
Bank Sector Weighting of Top 20 Investors in the KBW Regional Bank Index
IV. Shareholder Activism
32
Objectives and Trends in Shareholder Activism
Maximize shareholder value
Force sale of company or assets
Drive change in management / board
Push for return of capital (distribute cash)
Highlight need for changes in fundamental performance (refocus business strategy)
Corporate governance reform
Activist Objectives Reasons for Increasing Shareholder Activism
Increasing number of activist funds, including traditionally passive institutional investors
More market liquidity
Ease of information dissemination
Success of past campaigns
Erosion of traditional takeover defenses
Political and public support for shareholder rights
Overview of Shareholder Activism
33
$0.1$0.1$0.2$0.2$0.3
$0.5
$0.8
$1.2
$1.4
$1.7
$2.1
$1.5$1.6
$1.7$1.7$1.8
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
3Q '1
2
The Rise of Activist Hedge Funds
Most mutual funds and older LBO funds are barred from making unsolicited bids by clauses in their fund partnership agreements
o Pension funds demanded this out of fear of adverse publicity
However, hedge funds are not bound by such restrictions
o Hedge funds are becoming a force in nearly every public takeover because of the amount of capital at their disposal
o This activism requires attention and warrants careful preparation as for responding to a hostile takeover bid. In fact, some of the attacks are designed to facilitate a takeover or to force a sale of the target
o Diligent planning and a proactive approach are critical. Failure to prepare reduces a company’s ability to control its own destiny
While the number of proxy fights has remained relatively flat, the percentage of dissident victories (including outright sales, partial victories and settlements) have increased steadily
o Corporate control contests are increasingly voting contests with a large public relations component
o Companies need to focus on a variety of constituent interests including governance policies, social issues and traditional Wall Street metrics
Growth in the Hedge Fund Industry’s AUM ($ in trillions)
The Activist Hedge Fund
Overview of Shareholder Activism
Source: Barclay Hedge Alternative Investment Database.
Characteristics of Banks Targeted by Activist Investors History of underperforming on a variety of operational metrics
Performance suffering due to persistent margin compression, core deposit growth challenges, competitive pressures and credit deterioration
Weak demographic trends in the company’s market
High levels of competition from other banks in the market area
Increase in management compensation despite underperformance in stock price and operational weakness
Return on equity below the company’s cost of capital
Company has not redeemed TARP
Activist investor pressure on MHCs to undergo 2nd step conversion
Pressure for overcapitalized institutions to repurchase shares
Sale may be the only source of liquidity for investors in micro cap institutions
What Types of Banks are Targeted by Activist Investors?
34
V. Positioning For The Future
36
How Can Senior Management Create Shareholder Value?
Shareholder Value Be Available •Multiple Industry
Conferences & Road Shows
•Analyst Coverage (Multiple)
•Clear Financial Statements
Track Record of Improving Trends • EPS Growth • Book Value Growth • Loan Growth •Credit Quality •Credible Plan for the
Company’s Future
Defined Plan For Use of Capital • Stock Buyback •Dividend •Acquisitions – Be
Realistic •Growth
Return of Excess Capital: Best Options for Shareholders Our research suggests shareholders are most likely to benefit from a large, sustainable increase in a
bank’s common dividend
Performance is driven by investor perception of a stable dividend at a higher rate as well as the strong probability for further future increases
Highest stock price impact occurred through increasing common dividends but maintaining a payout ratio less than 20%, leading to a 9.7% Bank Index outperformance
Tax changes for 2013 will negatively impact dividends as drivers of stock multiples
Stock repurchase programs have been the second most beneficial option for bank to return excess capital
Banks that repurchased greater than 7.50% of their float outperformed their peer group index, confirming the positive effect large scale buy backs have on EPS
Least beneficial method of returning excess capital to shareholders is special dividends, as they have provided minimal share price outperformance in the 12 months following the declaration
Underperformance due to the one-time nature of this type of capital distribution
– Company management is perceived to view opportunities to internally return excess capital as limited
Special dividends be beneficial and lead to stock price outperformance provided they are declared under the appropriate set of circumstances and to the shareholder base
Source: Stifel Nicolaus Research.
Bank Stock Investors’ Perception
37
Source: SNL Financial and FactSet.
Conclusions Recently, returns in bank stocks have been on par with the S&P 500
The regional bank index returned 10.5% in 2012, which mirrored the return on the S&P 500
Trailing twenty-four month returns have slightly lagged the S&P 500, which returned 13.4%
Lowered expectations of bank stock investors are the result of changing industry trends:
Lower loan growth
Margin compression
Additional capital requirements (Basel III)
Bank investors are market neutral
Focus on current shareholders
Selectively target new investors
New positions likely came from transactions
Bank Stock Investors’ Perception
38
Appendix
40
Illustrative Model – Bank XYZ
Approach and Assumptions Illustrative, bottoms up valuation approach which depicts how the theoretical value of a bank and implied multiples are impacted by changes in assumptions in terms of profitability, asset growth and required capital
― By projecting an earnings stream based on an assumed ROAA and asset growth rate, one is able to calculate a dividend stream in relation to the excess capital generated above a certain TCE requirement. This dividend stream is then discounted back at the assumed cost of capital (assuming the dividend is a growing annuity) to arrive at the implied valuation of the bank. From that point, one can arrive at the implied pricing multiples.
What Will the “New Normal” Look Like?