In an increasingly expensive market for financial firms characterized by unproven hopes for increasing earnings, NYC-based Signature Bank (SBNY) stands out for delivering the goods. Despite having a small footprint with less than 30 offices, SBNY has consistently grown both earnings and revenues over the last four years. With solid deposit, revenue, and specialty income growth backed by extremely solid credit metrics, Signature looks likely to continue this performance for the foreseeable future.
Thesis
Earnings tripled between 2009 and 2012 ($1.31 to $3.91), and should grow 20% YOY again this year when the firm reports fourth quarter results in a month. (My full year 2013 estimate is for $4.67.) 2014 EPS should grow another 15-20% (My estimate is for $5.51/share). Against this growth level, Signature recently traded for ~$108 a share suggesting a 19.7X P/E, and a PEG around 1.15 based on both my estimates and consensus sell-side estimates.
Investment Backdrop
If this were the end of the story, then I would suggest SBNY was a good but not great investment, and investors should consider it carefully. However, it is not the end, and I think Signature represents a great asymmetric investment with 25% upside potential. This view is based on the strengthening earnings and growth story at Signature. Not only has SBNY consistently beaten estimates in recent quarters, but they have been raising guidance over time. In the most recent quarter, SBNY reported 38% YOY loan growth driven by strength in multifamily, commercial real estate, and specialty finance. Complementing this, the bank saw 40% growth in deposits. This is significant in that it shows that unlike so many other banks out there, Signature's growth is not tied to a recovery in the housing market. Instead the bank is a stealth play on the tremendous boom in multi-family housing which shows no signs of slowing, especially in metropolitan New York City. This boom in multi-family and commercial loans in NYC has resulted in 16 straight quarters of revenue growth, and this will likely accelerate thanks to the Fed's tapering program.
Stock Price Drivers
Signature Bank is the kind of investment that might make some investors nervous. After all, the company is not an obvious value play. But after investigating the company's past performance, management commentary, and the macro environment, I feel good about the firm's future prospects. In particular I see three factors driving the stock price going forward.
1.) The bank has significant earnings growth coming with growth in EPS (revenues) averaging 17.5% (15.0%) for the next two years according to sell-side analysts. (My own estimates agree roughly.)
2.) Margins are bottoming and should start to expand in the next quarter even before taking the Fed's tapering into consideration. This will lead ROE to expand from around 12.9% this year to 13.8% by 2015.
3.) Signature's loan pipelines are full, and the firm has significant opportunities to add revenue through new products like SBA loans, equipment loans, and opportunities in private banking.
Given these stock price drivers it is my view that Signature has room for its multiple to expand to 25X (giving it a still low PEG of 1.42), in line with other small fast growing financial firms. This view supports 25% upside in the price with further upside as 2014 gets underway and the positive story continues to become apparent to the market.
Management Commentary supports this view on my part. Signature is a company that seems to be in the sweet spot for growth which is what makes it so surprising that the firm is only sporting a 1.15 PEG. As management noted on the most recent earnings call:
Ken A. Zerbe - Morgan Stanley, Research Division
I guess, maybe just starting off a question on loan growth. Obviously, very, very impressive numbers this quarter. When you look ahead over the next quarter, the next year, is there anything on the horizon or even whether it's seasonality or a competition that causes you a little more concern than where we were, say, last quarter, in terms of the ability to continue to grow loans. Or maybe it's just, can you continue to hire teams and are they still out there, et cetera? So pretty open-ended question.
Joseph J. Depaolo - Chief Executive Officer, President, Executive Director and Member of Risk Committee
Well, Ken, nothing causes us any concern. The one thing we would highlight for this particular quarter where we had a little over $1 billion in growth was that when the 10-year went up to the 3% level, we saw a flurry of refinance activity because clients and prospects wanted to make sure that they got their rates in -- their loans done with these rates because there was an expectation that rates were going to go higher. So we saw a flurry of activity and so there may have been some pull forward into the quarter of that activity of refinance. And we also saw for the first time in a while some transactions whereby we're financing the purchases of real estate. So that was what would have driven the quarter to over $1 billion. For our expectations going into the fourth quarter, we look at an activity level of somewhere between what we did in the second quarter, which was $700 million, and what we did in the third quarter which was $1 billion. So nothing causes us concern to continue the robust growth that we've had over the last several years.
Ken A. Zerbe - Morgan Stanley, Research Division
Okay, perfect. And then just quick on expenses, I guess with the addition of the ABL team, should we -- have you changed your forecast or how you think about expense growth over the next year?
Eric R. Howell - Executive Vice President of Corporate & Business Development
With ABL -- and we're seeing a pretty robust pipeline on team growth, we project that expenses to be up in the 10% to 15% range, looking year-over-year going several quarters out.
This kind of guidance from an otherwise conservative management team really suggests this is a bank with explosive growth opportunities for the next few quarters at a minimum. I have listened to a lot of bank earnings calls, and there are virtually none where management sounds this confident.
Signature's Story Going Forward
Signature's record profitability in the past few years have been greatly helped by significant growth in deposits, both interest and non-interest bearing. Combined with premium loan pricing, SBNY has had profitability levels that would make other banks very envious. Thanks to higher service levels and faster closing times (generally around 45 days, a key consideration for many borrowers), the bank has been able to make loans at 25-50 bps above the competition. This is a key advantage which appears to be a durable effect going forward which may in fact grow in value as the economy picks up steam and borrowers are eager to get inexpensive loans ahead of rising rates.
Adding to the growth potential of Signature, the bank not only has a full backlog of loans in the pipeline according to management, but the company is hiring like crazy to drive even more growth. The bank expects to add an additional 8-10 teams of loan professionals which should help it to create additional banking relationships going forward. An example of this is a major deal that is in the works and Signature expects to close before the end of the year. This multifamily lending deal covers 86 buildings and will be one of the banks top 10 lending relationships when it closes. The continued acquisition of big loans, like that one, are great anecdotal support for the view that SBNY can continue its blistering growth.
A key criticism of my thesis that Signature's future growth isn't fully appreciated by the market is that fact that the bank commands a P/E of 20 vs. a P/E of 18 for peers. Now of course, most banks are barely growing earnings or revenues while SBNY is seeing 20% growth. But I also believe that sell-side estimates may be too low on future profitability. That is, I see Signature being a beat and raise story for the next year at least. In fact, many sell-side analysts seem to be building their estimates around roughly $3.0-$3.4B in annual loan growth. This is less than the annualized pace for Signature over the last year, and I think it undersells SBNY's likely growth for next year. I see loan growth of $3.7-$4.2B being more likely, particularly with the Fed tapering pushing borrowers off the sidelines in advance of rising rates. Supporting this view, the firm's loan growth was ~$4.0B annualized in the third quarter.
Additionally, one of the persistent headwinds for most banks has been the declining net interest margins. While SBNY's premium loan pricing has protected its margins to some degree the bank has still seen its margin decline as rates stayed low over the last few years and higher rate loans matured. As a bank specializing in primarily in commercial lending though, Signature differs from many banks in that its loan terms are usually shorter than those made by other banks. Commercial loans for example are frequently 5 or 10 years at most, compared with 20 to 30 years for home loans. As a result, Signature's portfolio looks much closer to bottoming in both my view and management's. Further, the bank should see a much faster rise in margins as rates start to rise around the Fed and akin to short duration bonds, over the medium term, the bank will be better able to take advantage of a rising rate environment.
Risks to the Story
There are two major risks to the SBNY story in my view, and both are unlikely to come to fruition.
First, as a NYC-based bank that does most of its lending based on the NYC real estate markets, Signature is critically levered to the local economy. What's more, this also makes SBNY more levered to the Wall Street environment than most firms. If Wall Street and the NYC economy were to tank, that would be very bad for SBNY. That said, this year has been a great year for equities, and next year looks to have an outstanding IPO market. While stocks may go up or down next year, there is little indication that Wall Street is getting ready to collapse the way it did during the financial crisis (and of course if this happens, virtually no stock will be a safe investment).
Second, there has been a fair amount of press around the incoming mayor of NYC, Mr. Bill de Blasio. While Michael Bloomberg had a very constructive relationship with NYC business interests, Mayor-Elect de Blasio is much more of an avowed liberal and fan of higher taxes and more redistribution of wealth. To that end, there was some suggestion on the campaign trail about de Blasio enacting rent freezes on select apartments and generally increasing taxes on New Yorkers. Frankly, this would undo some of the progress that has been made in expanding the number of apartments available for New Yorkers over the last few decades. Rent controls have always and everywhere been a consistent recipe for under-investment in housing, and given NYC's persistent housing shortage, particularly in Manhattan, I find it unimaginable that de Blasio will actually implement any sort of rent control proposal. Nonetheless, if he did, over the medium term it would certainly hurt Signature.
On the whole, while Signature Bank may appear expensive from a cursory glance, a deeper look reveals that the bank is actually quite inexpensive given its past growth and likely future growth. With the bank hiring many new loan officers, making significant new lending deals with big customers, growing both earnings and revenue in the high teens annually, and the Fed taper set to start benefiting the bank, earnings will be more than 30% higher within two years. While sell-side analysts are certainly not pessimistic on the stock, they are being too cautious given the firm's continuing track record of loan and deposit growth and management's explosive optimism. Given all these factors, Signature Bank should continue to be a 'beat and raise' story for the next few years and definitely warrants attention from investors.
Disclosure: I am long SBNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
Aucun commentaire:
Enregistrer un commentaire