The Wall Street Transcript recently interviewed Christopher Marinac, Managing Principal and Director of Research of FIG Partners, on his outlook for banks. (Note: stock prices have changed since this interview, as reflected in the accompanying charts). Key excerpts follow:
TWST: What should investors be doing at this point?
Mr. Marinac: It doesn't hurt to stay in cash. I think if you are buying banks right now, there are terrific opportunities out there, even though book values obviously are under pressure.
I would say that investing beyond just the next 30 minutes or the next 30 days is critical now. That sounds like good advice, and when you see stocks that are at $26 one day and $20 the next, it can be a bit frightening. We're certainly seeing that happen with certain banks. I am looking at SunTrust (STI) today, down a lot, and by the time you print this, who knows where the stock will be.
I think certainly there is a perception that companies are under more stress than their statistics would show. I think that unfortunately it's probably more about perception and not necessarily reality. And I say that because you have companies that are better capitalized than they were 30 days ago because of TARP. You have companies that do have an earnings stream even though it might be coming down incrementally from quarter to quarter. Right now a lot of these stocks simply do not have a bid, and if you are a long-term investor, and you could buy and be a bid when no one else wants to step up, there are some long-term benefits here.
So again, I'm looking at SunTrust as we're talking. What's the problem in buying SunTrust at $20? To me there is a lot of value there. But having said that, you have a market where everyone is selling and people aren't buying, and just by supply and demand prices are falling.
TWST: What would you look at beyond SunTrust?
Mr. Marinac: Well, I know the topic is Eastern banks, and we have liked companies like Boston Private (BPFH), which is now selling at $5; it's below the price where Carlyle invested money. We think that the company ultimately is in much better shape because they've already taken some very big hits on losses this quarter for some problem loan cleanup. I think that's a huge change for them, so Boston Private is a very interesting stock now, selling below book value.
Looking at some of the banks that have not yet been awarded TARP money, and again, this might end up being stale when you publish this, but Colonial BancGroup (CNB) is a name that we've liked. We think Colonial's franchise is worth more than the dollar and change it's selling for. The marketplace is flushing some of these stocks and this is one of them, and we disagree with the fact that the company should be trading this low. Now, fortunately Colonial seems to have found a little support here in the high $1.70, $1.80 range.
TWST: That's $1.70, $1.80?
Mr. Marinac: Correct, unfortunately. But again, it's a name that we have not recommended until the last week or so. We feel that Colonial is an interesting name at these levels because of the fact that the franchise, even though book value is reported at $6.50, it might really be a $4 book if you take a lot of haircuts, but again, you're paying $1.80 for a $4 book, and that book is adjusted. I think that's pretty interesting.
There are other names that have been beaten up recently. Take the example of PacWest Bancorp (PACW), which is a West Coast name, but it's emblematic of the market. That stock was at $28 not that long ago, within the last two weeks; it's now at $18.50. And again, PacWest has one of the better capital bases, one of the best deposit bases in the country. Their earnings stream, while it's come down, I think it's more intact than a lot of others out there at their size range — the $4 billion or $5 billion bank. Yet their stock sells at the price it does.
TWST: What's it going to take to change investors' attitudes toward the space?
Mr. Marinac: I think that a couple of things may happen, one of which is that we still have a lot of investors on the sidelines who have not come in and put money in banks in a big way. Eventually that will change. And whether it's Warren Buffett or whether it's other "smart investors" stepping up to support the banks, that may eventually happen.
I also feel that there is a certain amount of expectation that banks have losses to recognize, and until banks recognize more of those losses, there is a confidence factor there. I think seeing, ironically, some banks fail and actually seeing some purging of the system is actually going to be healthy. Moving some banks out of the industry is an example that, okay, we are trying to rid ourselves of the problem apples and make the rest of the bushel taste better. That's not going to happen in the fourth quarter 2008, it's not going to happen in the first quarter of 2009; it's going take several quarters, but we have to get through the process. It's unfortunately like curing a sick patient. It's very much a curable situation. It's just going to take time and effort, and the effort is recognizing losses and raising capital. The capital, I think, is in place, but the question comes down to, is there enough capital in place? And to a certain extent this is unprecedented. I mean, you are seeing businesses and you are seeing the acceleration of problems unlike ever before, and so there is a certain bit of disbelief that it is this bad and it may stay this bad. But again, I go back to the point that banks are a key, fundamental part of our economy, they are not something that will go away. It is not like this is a software maker that doesn't have any revenue and doesn't need to stay in business. I mean there is a business here that can hold. I think, unfortunately, you are going to see not only consolidation but also the removal of capacity. Just like cutting back airline schedules, we have to cut back bank charters and we are just in the early part of that.