Mid-Month: Private Equity in Banks, a Conversions Primer ahead of Needham, a Bank at 40% of Book
Also Business Development Company credit and Mortgage REIT margin call risk
In this note:
Bud Light level value at INBK?
Conversions and Needham
Payment in Kind at Ares and Golub
Private Equity - a distressed bank’s guardian angel
A few brief items before the 5 Points:
What’s the TLDR here with banks, do I buy? Most of you are scrolling on your phone and don’t want to read all this, just if banks are “cheap” and whether to allocate to the sector. To do this, bank investors sometimes compare where their own sector is trading versus the broader market on forward P/E. The short answer is that yes, banks at 6-9x forward earnings are a lot cheaper than the broader market at 20x+ earnings, and the current ratio is about 35-40% of the broader market vs 50% longer term, even giving leeway for bank estimate trimming.
However if you have read past issues of this note you know the bank sector is currently developing a wide dispersion between the haves and have nots. Today many banks like Schwab, Bank of America and the Hawaiian banks to name a few heavily purchased the same 1-2% fixed rate bonds that sank Silicon Valley.
Most banks are capable of growing out of the current rate pressures, but the banks that overbought bonds will pull this ball and chain for many quarters to come, or take a capital hit for the privilege of moving on, which also limits growth capacity.
Be sure to read balance sheets if making individual investments in the sector.
Banking yellow flags: Investor Communication subtopic
I got a quarterly update the other day, that some bank spent my client’s money to print and mail out.
It has recently become popular to share “red flags” for investors. The mailing triggered me to begin writing down a list of “yellow flags” for bank investors.
There are too many to list overall so I will simply share a few related to the theme of “investor communications”. If popular I will include other subtopics later. In specific:
Mailings Spending $3-$4 or more per shareholder mailing something glossy out. If someone who loves paper needs it, he or she can print it out. Elite, efficient banks spend time thinking about how to cut expenses like this one.
Hiding expenses “Adjusted EPS” for legal expense, closing a business, selling a property is very much not adjusted on the income statement of your law firm, property broker or investment banker. These firms make great money because banks are in the habit of discontinuing things. It is all real, especially stock compensation, unless management is paying for it instead of shareholders, but I cannot think of a time that has ever happened.
Hotel subsidies Holding an investor day at a posh hotel with heavy company representation. Rent a room in HQ city and bring in some division heads if needed.
Conference parties Sending more than 2 people to any investor conference.
Key metrics Playing keep away with metrics your investors need. It will simply create an assumption of bad news. Comerica shares actually rose after they recently gave (dour) color on spread revenues.
Providing detailed guidance. Investors like it at first, because they think it “makes our job easier” which is false. It incents management to hurt value by managing to a short-term number, encourages traders / people to just focus on the number and not the underlying drivers, and for algorithms to read and trade your press release. If you want to help long-term investors, give color on the general conditions you are seeing in your markets on a conference call or in an 8K.
No change to SVB tax rate guidance in 1Q23:
In commercial real estate, sometimes a picture is all we need. A few weeks back I published a table showing commercial mortgage REITs have stopped originating new loans as indication of a freeze in sector activity. Today we have the graph below, in which Trepp, a premier real estate data firm, separates out delinquencies within CMBS each month.
While slow developing, it seems likely that these trends will not reverse anytime soon. Potential buyers will need patience, and lenders will need reserves. Office leads the way, followed by hotels dependent on business travel to stressed downtowns, followed by excess multi-family supply.
Incredible India!n banks: Given 5 points has hundreds of subscribers either living in India or of Indian descent, I’m curious - in your opinion is HDFC worth 20+x earnings power? This 5,608 branch bank has always been interesting, mostly as a personal account investment, because of all emerging market bank ADRs it is among the few not to evaporate shareholder wealth but grow it.
on to the points:
1. First Internet Bank (INBK): Bud Light level value?
