“TARP Exit Dilution Ranges From 30% To 70% Of Outstanding Amount In Recent Capital Raises: Jeffries And Company Expert ...” |
| Posted: 13 Jan 2011 12:29 PM PST On Thursday January 13, 2011, 3:29 pm EST 67 WALL STREET, New York - January 13, 2011 - The Wall Street Transcript has just published its Northeast and Mid-Atlantic Banks Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online. Topics covered: Regulatory Reform Uncertainty - Heightened M&A Activity - Regional Bank Outperformance - Demutualization and MHC Conversion Opportunities - Spotlight on Capital and Credit Companies include: Boston Private (BPFH); Fulton Financial (FULT); National Penn (NPBC); Northwest Savings (NWBI); People's Bank (PBCT); Sandy Spring (SASR); Sterling Bancorp (SI); Valley National (VLY); AmTrust (AFSI); Astoria (AF); BMO (BMO); Beneficial (BNCL); Bridge Bancorp (BDGE); Bryn Mawr Bank Corp. (BMTC); Center Bancorp (CNBC); and many more. In the following brief excerpt from just one of the in depth interviews in this extensive report, an experienced equity analyst discusses the outlook for the sector. Casey Haire is a Vice President on the U.S. banks equity research team at Jefferies & Company, Inc., and contributes to coverage of regional banks. Previously, he was a VP at Merrill Lynch, and an Analyst with Putnam Lovell NBF. Mr. Haire is a graduate of Middlebury College. TWST: Tell me a little bit more about Signature Bank (SBNY). What's the story there? Mr. Haire: Signature is kind of a standout in that their business model has allowed them to grow their balance sheet at a double-digit rate without experiencing any significant credit quality deterioration. Signature banks private enterprises in the New York City area, and they compete against the mega banks, using a very high-touch relationship banking approach and a very conservative underwriting. They were pretty much the only ones opened for business in 2008. So they booked a lot of CRE, and I think 90% of their CRE booked is 2008 or later, so credit quality has held up amazingly well. They're growing their balance sheet, and they are going to be - they are putting double-digit EPS growth over the next coming years. So it's really just a rare growth story within financials. TWST: As you talk to investors, are you seeing interest in this space? Mr. Haire: Certainly. I mean, there are a lot of questions around M&A recently, with the BMO (BMO)/M&I (MI) transaction announced last week. So that's definitely a theme that investors are interested in; what kind of premiums will banks get, when does the cycle come back in earnest, now that the FDIC is not as aggressive as it has been in the past. Another question is who are the consolidators and who are the sellers and who is the buyer and then, specific to Webster (WBS), they're still in TARP. There were two TARP exits last week with First Horizon (FHN) and Huntington (HBAN). First Horizon redeemed, got out of TARP with only a 30% of TARP capital raise. Huntington was much more closer to 70%. So what is the price tag here at TARP? So that's a question for a lot of names in my coverage universe, specifically Webster. They're out there saying they hope to get out with $100 million to $150 million. So those are two teams, and then the final is just the revenue growth, is why do I buy these? What do I get in front of these names with all the revenue headwinds, specifically fin-reg reform and the interest rate environment? But that's actually kind of a refractor from the interest story. But in terms of M&A and TARP, those are definitely the top questions. TWST: Are you advising people to expect a lot of consolidation going forward? Mr. Haire: We certainly think it's inevitable; it will come back at some point. In terms of pricing, we don't think it will be as strong as in the past cycles. I think certainly last week, the example of M&I, their disclosures and the marks that BMO took on it, indicated that M&I was only halfway through the credit cycle. While it can be difficult to determine how conservative they were being, those were pretty big marks given that M&I had taken a lot of pain in the last couple of years. So when you are taking big marks on a target's loan book, that really dings your capital ratios because of the amount of goodwill created. So in that kind of environment, it's going to be hard to argue for huge premiums in M&A going forward. TWST: And in December, it was Wilmington Trust and M&T (MTB), which was a big discount. Mr. Haire: Yes, and that's another example to highlight that each transaction will be unique. The main difference between Wilmington Trust (WL) and M&I is that Wilmington's footprint in Delaware was an area that was late-cycle CRE. And the bank was clearly behind the eight ball on reserves. M&I had already recognized significant loss content, had been raising equity and was further along in the credit cycle relative to Wilmington. Hence, the huge discrepancy in pricing as relative to tangible book. TWST: So where are you pointing investors now? Do you see some good stories? Mr. Haire: I feel better about Webster than I do BPFH, just given that Webster is further through the credit cycle. Their reserve ratio is very strong, which should allow for some reserve bleed at least over the next year or two. They have anticipated the revenue headwinds from fin-reg reform and have redesigned their deposit products accordingly. So that should mitigate that sort of compression. The revenue headwind from low interest rates is a concern, but with a 10-year yield springing up recently, that should alleviate that somewhat. And the recent redemption of TARP removes the overhang of the capital raise and restores capital ratios meaningfully. TWST: BPFH, what are you wanting to see there so you'll feel more comfortable about them? Mr. Haire: So BPFH, they - it's really all about northern California for now. In Boston, they're doing fine. They are made up of four banking subsidiaries. Boston is by far the largest, and then their northern California sub, Borel, is the second largest. Until they can get the credit quality right in northern California, that stock is going to continue to trade at a discount to peers. So investors will want to see NPAs turn the corner and start to decline in northern California, and you want to see that provision, which has been a total wildcard, come down meaningfully. Note: Opinions and recommendations are as of 12/20/10. Casey Haire Vice President Jefferies & Company, Inc. 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 Follow Yahoo! Finance on ; become a fan on Facebook. 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