Signature Bank Going Into 2022 Loaded For Growth

 

I saw more upside in Signature Bank (SBNY) when I last wrote about the stock a year ago, but I’m not going to pretend I expected another double. While the shares have pulled back on worries about the recent weakness in cryptocurrency, and perhaps the additional equity raise as well, there are multiple strong growth drivers at this bank as it heads into 2022 – not only is the digital/crypto banking business growing, but so too are businesses like capital call lending, mortgage warehousing, and mortgage servicing, and Signature is one of the most asset-sensitive banks I follow, meaning that it has significant earnings leverage to future rate hikes.

I don’t have an issue with the idea that Signature is a riskier growth story than the typical bank, or even other growth names like First Republic (FRC), East West (EWBC), Pinnacle (PNFP), SVB (SIVB), and it’s certainly true that Signature Bank shares have outperformed all of those names by a wide margin over the last year. Trading at under 13x my 2023 EPS estimate (against an average of around 11.6x for regional banks irrespective of growth) and below my long-term core earnings-based fair value, I still see upside. This is a riskier-than-average business model and I’m a little nervous at how popular the stock is on the sell-side now, but it’s hard to argue the shares are undervalued unless you believe the core lending operations are going to slow markedly.

 

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Signature Bank Going Into 2022 Loaded For Growth

As Credit Stabilizes, Signature Bank's Growth Story Comes Into Play

Recommending Signature Bank (SBNY) in 2020 wasn't the most popular call, and indeed this CRE-heavy lender did suffer through much of the year due to worries about the bank's exposure to multifamily and retail property in the New York City area. Since the election, though, the shares have rocketed up on increased confidence tied to COVID-19 vaccines (and the prospect of a return to more normal economic activity in 2H'21), and the shares have outperformed its peer group on a three-month, 12-month, and three-year basis.

Signature is not fully out of the woods yet, and 2021 will almost certainly see higher charge-offs, but 2021 will also see the company putting more of its under-utilized liquidity to work. What's more, I believe investors will see meaningful growth in C&I and specialty lending over the next few years, as well as growth in fee-generating businesses like its specialty mortgage servicing and SigNet digital banking platform. All told, I believe Signature is priced for double-digit long-term annualized total returns, and though it's a riskier-than-average bank, it's still worth a look after this big run.

 

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As Credit Stabilizes, Signature Bank's Growth Story Comes Into Play

Signature Bank Standing Out With Above-Average Growth Potential

Given how investors are prioritizing positive operating leverage with banks, you might think that Signature Bank’s (SBNY) negative operating leverage would be hurting sentiment. What’s really happening is that investors are prizing operating leverage in the absence of evidence of growth – in other words, what is spending more on opex getting its investors? In the case of Signature, the bank is following a clear strategy of building its business, including multiple growth drivers, and with two straight quarters of better than expected pre-provision profit performance, the shares are up about 17% since I last recommended them (beating its peer group by over 12%).

I don’t see quite the same undervaluation as before, but I still see upside and strong bank growth stories are rare enough as it is. Up to around $160, this is still a name I’d consider buying.

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Signature Bank Standing Out With Above-Average Growth Potential

Liability-Sensitive Signature Bank Investing In Next Growth Drivers

At a time when asset-sensitive balance sheets are starting to really take a bite out of bank earnings, Signature Bank’s (SBNY) liability-sensitive balance sheet certainly stands out. That isn’t to say that Signature is going to reap a windfall as rates decline, but whereas many banks are look at 10bp-20bp of spread compression (or worse) over the next year or two, Signature will likely see some modest improvement. On top of that, Signature has been investing fairly aggressively to expand its private banking and venture/private equity banking capabilities.

With what I think will prove to be manageable exposure to New York multi-family real estate and new growth opportunities to pursue, I believe Signature is undervalued. Pre-provision profit growth over the next couple of quarters won’t look very exciting, and could well limit share price appreciation, but by early 2020 I believe the Street will start rewarding the stock for the above-average pre-provision profit growth it should start delivering.

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Liability-Sensitive Signature Bank Investing In Next Growth Drivers

A 'Boring' Quarter At Bank OZK Is Just Fine

Bank OZK (OZK) has had a rough 12-24 months relative to the “average” bank stock, as investors have grown increasingly worried about OZK’s heavy exposure to riskier construction lending, and particularly in markets like New York City and Miami, as well as its high beta funding structure. While the shares have continued to underperform over the last three months, operating performance has at least settled down.

If a significant recession is right around the corner (or just a rough period in commercial real estate), Bank OZK will have problems – the bank’s underwriting has always been sound, but it’s tough to thrive if and when your neighborhood is on fire. If the bank can navigate this cycle without significant losses and maintain a long-term core earnings growth rate in the high-single digits, though, the valuation on these shares is pretty interesting today.

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A 'Boring' Quarter At Bank OZK Is Just Fine

Signature Bank Diversifying And Investing For Growth

As was the case for most banks, 2018 wasn’t an easy year for Signature Bank (SBNY), but this New York/private banking-focused specialty bank is going into 2019 with better momentum and a cleaner, more interesting business mix. It also certainly doesn’t hurt that this liability-sensitive bank is looking at the end of the rate hike cycle.

Between growing/expanding the West Coast business, supporting the new private equity and digital asset banking businesses, and the blockchain-based Signet payments business, Signature has some interesting growth opportunities queued up, and I believe there continue to be better-than-worthwhile opportunities out there for service-centric banks at a time when many larger banks are managing their business with a cost focus. If high single-digit core earnings growth is a reasonable expectation over the next five to 10 years, I believe these shares are undervalued below $140.

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Signature Bank Diversifying And Investing For Growth

Quality And Conservatism At People's United Comes At A Cost

There’s a lot to like about People’s United Financial (PBCT). A leading bank in New England (#4 in deposit share), People’s United services a client base with well above-average household income and has maintained excellent full-cycle credit quality versus its peers. The bank has also had solid success in expanding its lending franchise into the New York and Boston metro markets and has produced some good long-term C&I loan growth numbers. I’d also note that the bank pays a fairly attractive dividend and operates with a conservative financial structure.

There are also things that aren’t so good about People’s United, though, including the company’s persistent below-peer profitability and more limited growth prospects. Loan growth is looking more challenging in 2018 and the bank’s asset sensitivity may not be worth as much if we’re closer to the end of the rate cycle. People’s United has long underperformed regional banks as a group, and while I do see some value here, this is a tougher call given the more diminished growth prospects that I see.

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Quality And Conservatism At People's United Comes At A Cost

With Weak Asset Beta And Rising Deposit Beta, Signature Bank Must Drive Loan Growth

Deposit beta is getting more and more attention these days with bank stocks, but asset betas are also important, and in the case of Signature Bank (SBNY), I’m worried about the company’s net-negative leverage to further rate increases. With little-to-no juice on the NIM line and no real fee income-generating business to speak of, Signature Bank’s growth is tied to its ability to grow the loan book. Luckily for investors, there are a lot of small(ish) privately-owned businesses that feel underserved by larger banks, and Signature is taking its show on the road and looking to open private banking offices on the West Coast.

Signature Bank is a different sort of bank, but there’s only so far “different” goes in terms of valuation. I’d pay a little more for a bank that is likely to earn 14% ROTCE in 2018 and generate double-digit earnings growth over the long term, but I worry that Signature may remain out of favor a little while longer as taxi medallion credit issues and asset sensitivity weigh on sentiment.

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With Weak Asset Beta And Rising Deposit Beta, Signature Bank Must Drive Loan Growth

Signature Bank Has Its Challenges, But The Valuation Is More Interesting

While Signature Bank (NASDAQ:SBNY) went along with the banking sector in its post-election run, the prior underperformance up to that point means that the trailing twelve-month appreciation in the stock is only about 10% - well below the performance of many bank stocks. As is often the case when former high-flyers start underperforming and/or trading at reasonable (or at least more reasonable) multiples, it's definitely worth asking if there's opportunity.

In the case of Signature, I'm cautiously optimistic. I believe the company can maintain a mid-teens earnings growth rate, and that supports a fair value a little bit above today's price. I'd also note that the company's combination of growth and returns on capital suggests that it's undervalued on a TBV basis. While weak trends in the taxi medallion portfolio and possibly slower multi-family lending should be watched and the shares aren't a clear-cut bargain, the stock could have some relative appeal compared to other banks (many of which are quite richly valued now).

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Signature Bank Has Its Challenges, But The Valuation Is More Interesting

Investopedia: 2011 In Review - Regional Banks Are Suffering

The best that can be said about regional bank performance in 2011 is that the smaller regional banks did less poorly than their larger brethren this year. In fact, as measured by the Keefe, Bruyette & Woods Regional Banking Index, regional bank stocks are down more than 7% on a year-to-date basis and down about 2% on a rolling one-year basis. That's better than the larger cap KBW Bank Index (which is down almost 24% on a year-to-date basis), but still well short of matching the S&P 500 this year.

Is there really much surprise in the performance of these banks? Consumers are trying to repair their personal balance sheets, property values and unemployment remain stubbornly disappointing, and loan demand is a mess, as generally only poor credit risks seem to be actively seeking loans. Were it not for the concerted efforts of the Fed to keep rates low, many banks would be in tough shape. (For related reading on the Fed, see How The Federal Reserve Manages Money Supply.)

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Investopedia: M&T Bank In A Rare Class

The meltdown in the banking sector has had some interesting consequences. Nimble banks with fairly clean balance sheets like Bank of the Ozarks (Nasdaq:OZRK) have taken advantage of FDIC assistance to significantly expand their footprint by acquiring failed banks. Once-respected giants like Wells Fargo (NYSE:WFC) and U.S. Bank (NYSE:USB) have seen investors apply major haircuts to their future earnings power, and former winners like Washington Mutual and Wachovia were basically gutted.

Curiously, M&T Bank (NYSE:MTB) has come through this mess relatively unscathed. While sound underwriting certainly helped limit the financial damage, a strong reputation with investors has buoyed the stock price as well. Consequently, it's one of the rare banks out there that does not look like a tremendous bargain at current prices. 


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M&T Bank In A Rare Class (MTB, PNC, FNFG, NYB, HBC, C, SBNY)