I was caught somewhat off-guard by an article on Customers Bancorp (CUBI) recently authored by Seeking Alpha's own CBOE Trader. I had looked at CUBI somewhat informally on a colleague's recommendation and had noted, as CBOE Trader did, some positive metrics and a seemingly undervalued stock. However, when the article's comments section yielded skepticism based on Jay Sidhu's efficacy as a CEO, I realized that my preliminary analysis had glossed over an important consideration.
Sidhu was once called "The CEO with Nine Lives" by a banking industry analyst. His bold M&A-fueled growth strategy helped build Sovereign Bank from a small S&L outfit with an IPO value of $12 million to the 17th largest financial institution in the country, a nearly $12 billion cap, 650 branch entity by 2006. However, in that same year he resigned from the bank after a well-publicized dispute with San Diego-based Relational Investors, an activist shareholder group that had bought a 6% stake in Sovereign.
When CUBI recently acquired a reputed $50 million stake in India-based Religare Enterprises Ltd (since reduced to a $25 million investment), it was hard not to conjure images of Sovereign the sequel. Sidhu, however, insists that a different time calls for a different strategy. His track record with Sovereign between 1989 and 2006, Sidhu told me in a phone interview, "occurred in an environment where opening new branches and M&A were the way to grow a bank." In the current environment, he reckons that "there are tremendous opportunities to take advantage of organic growth, that is to truly differentiate yourself using technology and talent."
So why the Religare acquisition? By Sidhu's account, it was to bolster both business lending, as many Small and Medium Enterprises (SMEs) in the Boston-Philadelphia corridor are pharma or software services companies that have relationships with India, as well as personal banking, with a growing regional customer base of Indian-Americans. It is part of the company's broader strategy to build a customer base through differentiation, not the first domino in a series of acquisitions activity. "Once we're trading at the kind of multiples we should be," he says, "maybe then we'll consider M&A."
Even without significant M&A activity, Customers was named the nation's fastest growing bank by Bank Director Magazine, with impressive top-line revenue growth. The primary driver was an increase in total loans, from $250 million to $4 billion in Sidhu's tenure. New York multifamily loans are the biggest constituent of the growing portfolio, with the broader multifamily sector comprising about 30% of the total. The loan portfolio also contains a 20% share in business banking, with specialized business loan teams in New York, Boston and Philadelphia. An additional 25% is allocated to relatively low-risk collateralized mortgage warehouse lending, and the remaining loans in single family mortgage or home equity. Nonperforming loans account for less than 0.5% of the total.
On the deposit side, CUBI has built up a portfolio that included 19% non-interest bearing demand deposit accounts last quarter, above the sector average which tends to toward the mid-teens. One of the key features has been the pursuit of the "underbanked", which has led, among other things to a partnership with student service Higher One (ONE), which according to management has garnered 9000 student accounts. Other targeted demographics include senior citizens, who increasingly prefer to bank remotely.
Overall, analyst consensus puts the bank at 10-11% return on equity for the next two years with the company trading at roughly 11 times projected earnings, according to Sidhu, who cited a 15x forward P/E multiple for community bank stocks. The top 10 holdings of ABA NASDAQ Community Bank index, to which Customers was added in December 2013, are trading at roughly similar forward multiples according to Capital IQ.
|Commerce Bancshares, Inc.||(CBSH)||15.97|
|TFS Financial Corporation||(TFSL)||64.94|
|Hancock Holding Company||(HBHC)||17.3|
|Investors Bancorp Inc||(ISBC)||26.25|
|UMB Financial Corporation||(UMBF)||20.96|
|Texas Capital Bancshares, Inc.||(TCBI)||21.6|
|Fulton Financial Corp||(FULT)||15.82|
|Home BancShares, Inc.||(HOMB)||29.24|
|Susquehanna Bancshares Inc||(SUSQ)||13.51|
|Washington Federal Inc.||(WAFD)||16.08|
|Glacier Bancorp Inc||(GBCI)||23.92|
|Umpqua Holdings Corporation||(UMPQ)||20.92|
|First Financial Bankshares Inc.||(FFIN)||27.32|
|Bank of the Ozarks, Inc.||(OZRK)||24.27|
|Cathay General Bancorp||(CATY)||19.49|
|First Citizens BancShares Inc (DE) Class A||(FCNCA)||13.28|
While it is not a given that Customers' rapid growth will ensure the bank a spot among the top of the peer group, it is nonetheless, according to fundamentals, a stock with clear upside, as my aforementioned Seeking Alpha colleague noted back in December.
Given all this information, it is not unreasonable to infer that Sidhu's presence has made investors wary, weighing on the price of a highly promising growth stock. It is disputed by no one that he has proven himself at the operational level. But will that result in value for the shareholders? Sidhu defends his track record by pointing out an average annual return on equity of 20% over his tenure at Sovereign (and better return than that since he took the helm at Customers). Detractors at the time insisted that share performance should have been better, noting a negative market reaction to particular strategies and acquisitions.
Nonetheless, Customers Bancorp is on track to become a much bigger player in the Northeast commercial banking space. Those interested in the sector, or more broadly in small caps, would be well served to weigh the pros and cons.