tag:blogger.com,1999:blog-2149523431587168680.post7986743505447179121..comments2024-01-16T00:12:23.220-05:00Comments on Oddball Stocks: Determining intrinsic value for a bank; why discounts to book shouldn't persistNate Tobikhttp://www.blogger.com/profile/05660387777171986124noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2149523431587168680.post-55694408472581349572014-04-25T09:25:54.399-04:002014-04-25T09:25:54.399-04:00I don't think that low RoE/low PBV is higher m...I don't think that low RoE/low PBV is higher math as Graham put it, but very straight forward valuation. If capital is stuck in an investment earning returns on invested capital lower than the cost of capital, that investment is destroying value hence the discount to book. It could be invested in the broad market and then it would be worth 1x book. It is true that those same assets of a low RoE bank would be worth more in the hands of another owner. And that's the crux, it is only worth more in those hands, so this approach still seems to me a big gamble on M&A. Seeing beyond the current situation I absolutely agree with but this is purely betting on an acquisition. That might work with a basket of such stocks but not with a single one. In Japan you have numbers of banks that continue to run on a stand-alone basis and trading below book for a decade now.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-40343091865645119872014-04-12T21:45:45.497-04:002014-04-12T21:45:45.497-04:00Nate,
Do you consider a bank's underwriting/pr...Nate,<br />Do you consider a bank's underwriting/profitability history when selecting banks below 1x book?<br />ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-57983677147055594872014-04-12T05:08:58.074-04:002014-04-12T05:08:58.074-04:00Your valuation method is essentially the same whic...Your valuation method is essentially the same which we used to value small businesses when I was doing a student project for one small consulting office. That is also the common sense method that all businessmen understand regardless of their educational background (no need for CFA). <br /><br />(Just for side note we didn't use the model because we were thought to do the valuation that way in school, but because the boss said it was simple and it works and it gives the right answer.)<br /> <br />Like the SA article shows, one can find justification for any price prevailing in the stock market from "higher mathematics" (as Ben Graham put it). In this case low ROE -> sell your stock significantly below liquidation value.<br /><br />-EpaAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-52066203900225339212014-04-11T16:43:22.614-04:002014-04-11T16:43:22.614-04:00It was a much bigger deal back in 2010/2011 than i...It was a much bigger deal back in 2010/2011 than it is today, but my biggest worry would be that book doesn't reflect reality. Some community bankers don't want to or just can't (to maintain the illusion of sufficient capital ratios) mark their books. You saw (and still see to a lesser extent) a number of marks to the loan portfolio when an acquirer's loan team comes in and does DD. My favorite metric on some of those M&A presentations was Price / Adj. Tang. Book. <br /><br />But I believe you are thinking about it the right way through an acquirers eyes. C-suite headcount/public company expense are easy culls for a larger institution. That's not even considering eliminating some of the branch footprint.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-27223943816480200202014-04-11T14:30:13.420-04:002014-04-11T14:30:13.420-04:00Nate,
It’s a fantastic thing that regulators are ...Nate,<br /><br />It’s a fantastic thing that regulators are preventing the big banks from making any more stupid acquisitions. They will be forced to innovate by investing in technology and returning capital back to shareholders (utility model). The big banks don’t have to do a damn thing, but watch themselves get larger and larger over time. <br /><br />Look at the FDIC data on deposit market share in the US and go back 20 years. I believe the top 10 banks controlled 20% of the deposits and today it is more like 55%. See the trend? You don’t need to have a high IQ to figure out what’s the end game. The banking system in Canada shows you what the end result will be. <br /><br />Here’s something to think about. Right now all the banks are enjoying low costs on their deposits and many of them have more deposits than they can lend. How many of these deposits are gonna shift to other institutions when short term rates begin to rise? Old granny is gonna move her money to CD’s offering higher yields from her community bank in an instant since she needs income to live off. On the other hand when you look at the major banks they have engineered clever ways of keeping their deposits “sticky”. What, you don’t have the minimum $5,000 in your checking account? You have to pay $10 per month or whatever they charge. Throw in all the other services the major banks can offer online and the constantly improving technology it’s gonna be a hassle with deal with a smaller community bank unless they are willing to give back some of their earnings to the customer.<br /><br />Yes there’s value in the smaller community and regional banks, but when you compare the expected long term returns to the larger US banks… the discrepancy isn’t that large. May as well buy once and collect dividends till the end and avoid paying capital gains or margin your gains and purchase other cheaper companies down the road.<br /><br />-DL<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-88843833116836692432014-04-11T13:14:55.409-04:002014-04-11T13:14:55.409-04:00Yes, it's the side business that adds value fo...Yes, it's the side business that adds value for sure. A lot of community banks have specific niches like auto lending, or certain types of construction lending etc. Some have valuable financial advisories too.<br /><br />If I understand you correctly you'd say just buy the largest banks and wait for them to acquire others? I think the problem with that is the larger banks have reached their limits and regulators are preventing them from growing via acquisitions. Look at Capital One's purchase of ING Direct as an example. <br /><br />Maybe another way to play it is by identifying acquisitive regionals that will be the winners. In your view who are the winners going to be?<br /><br />I'm terrible at identifying winners ahead of time, but I seem to do alright identifying cheap things. I'm going to stick with what I'm good at.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-43509542359467115952014-04-11T13:11:46.490-04:002014-04-11T13:11:46.490-04:00Taylor,
This is a great idea, a bank acquirer cou...Taylor,<br /><br />This is a great idea, a bank acquirer could easily use the tool to find potential acquisitions. It isn't much different than how any investor would use the tool to find banks to invest in.<br /><br />I think the problem with a rollup model is you need the bank regulator's approval to buy above a certain threshold of a bank. For someone who has these qualifications a rollup makes a lot of sense.<br /><br />NateNate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-12556956572837194212014-04-11T13:09:29.617-04:002014-04-11T13:09:29.617-04:00Banks are the ultimate commodity business. What se...Banks are the ultimate commodity business. What separates one bank from another is obtaining revenue outside of the net interest margin side. JP Morgan, Wells Fargo, US Bank, NY Bank Mellon are great examples of this. Small community banks are just a play on how steep the yield curve is going to get in the future. Sure some of these banks got niche businesses, but with internet banking gaining steam these businesses won't have the capital to spend on technological innovation to keep up. <br /><br />Consolidation is the end game for this industry so why not just stick with the inevitable winners? On a depressed earnings basis the major banks are still solid values. Plus you got the back stop of the Federal Reserve to keep you sleeping well at night!<br /><br />-DLAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-21676246922589461272014-04-11T12:58:13.006-04:002014-04-11T12:58:13.006-04:00Nate,
Imagine you were a PE investor or a search ...Nate,<br /><br />Imagine you were a PE investor or a search fund guy looking for a scalable business. Why wouldn't you use your CBD tool to go find a bunch of undervalued banks and roll them up into your own bank holding co.?<br /><br />Or would you?<br /><br />It seems like a very simple and scalable model with current undervalued acquisition opportunities. Now, granted, if you're acquiring you'll probably pay closer to full value than the current bargains but it just got me wondering...Taylor Conanthttps://www.blogger.com/profile/18270678440957992085noreply@blogger.com