The banking industry in the U.S. is primarily a slow growth and cyclical industry. For this reason, the PE ratio of most banks is below average for the stock market. However, there is one larger bank that is rapidly growing and has proven recession resistant. That bank is Signature Bank (NASDAQ:SBNY) of New York City.
Signature Bank is the fastest growing large or midcap bank in America. It has had 19 consecutive quarters of record profits and at least five consecutive earnings estimates beats. Signature Bank also has an above average return on equity and below average problem loans. Quite often, rapidly growing banks run into trouble with elevated non-performing loans. Signature Bank's non-accrual loans were only 0.21% of total loans on June 30, 2014. Signature Bank has 27 branches (they call them private client banking offices) in and around New York City. Despite its size ($24.5 billion in assets as of June 30, 2014), it is a traditional commercial bank. It has no trading activities and little overseas presence. In fact it has fewer activities than other traditional banks as it has no trust or insurance services and only a moderate wealth management division.
Banking is a low growth mature business in the U.S. Most banks in America currently have loan and deposit growth under 10% per year. Signature Bank's loans as of June 30, 2014 totaled $15.43 billion. This was up 8.5% from the prior quarter and 39.4% over the past twelve months. Loan growth has been particularly strong in the multi-family, commercial real estate and specialty finance areas. Management in the June 2014 quarter conference call stated that the loan pipeline remains robust. Deposits stood at $19.76 billion on June 30, 2014, up 7.9% from the prior quarter and 29.4% from the prior year. This loan and deposit growth has translated into earnings growth. Earnings per share were $1.48 in the second quarter of 2014, up 32.1% from $1.12 one year earlier. Earnings are estimated by analysts at $5.81 in 2014, up 22% from $4.76 in 2013.
How has Signature grown more than its competitors? To achieve this growth it must take business away from them. Signature Bank's primary strategy to gain market share is to attract commercial banking teams from its competitors to its institution. These teams have strong relationships with their customers who follow them to Signature Bank for the relationship. Signature Bank is located in a market led by money center banks such as JP Morgan Chase and Citi. Commercial customers of these banks, especially those who are mostly deposit oriented often get lost in the shuffle at these bigger banks but get lots of personal attention from Signature Bank's teams.
Signature Bank has achieved growth on the loan side primarily through multi-family and investor commercial real estate as well as specialty financing. For multi-family and commercial real estate, the Bank's edge is fast closing times, usually within 45 days. It also has benefitted from a refinancing boom. Specialty financing is focused on equipment loans and leases on items such as taxis, trucks, trailers, busses, freight cars, construction equipment, and most recently inland barges and the commercial marine industry. This division was started up two and a half years ago when a team of lenders joined Signature Bank from North Fork after it was acquired by Capital One. It has grown to over $2 billion in outstandings. Recently the Bank started lending to franchisees as well.
Signature Bank has plenty of room to expand in the New York City metro area. It currently plans to open three more offices this year. The Bank recently opened its first office in Connecticut. Eventually the Bank will look to other larger markets with a heavy big bank presence for expansion.
Comparison to Bank Peers
|Banks of Similar Size||Assets 3/31/14(1)||2014 EPS Growth(2)||2013 EPS Growth||PE||Loan Growth(3)|
|High Growth Banks|
|First of Long Island||2,407||4.6||-11.1||15.5||28.1|
(1) In millions
(2) Estimated growth for 2014.
(3) Growth for the year ended March 31, 2014.
As shown above, Signature Bank has much stronger earnings per share and loan growth than peers of similar size. The only real peer it has is SVB Financial which is similar in size and growth. Signature Bank has a much stronger loan and deposit growth rate than SVB and a similar EPS growth rate. Loan and deposit growth lead to EPS growth and indicate Signature Bank's EPS growth rate may be higher in the future. Signature Bank does have a higher PE ratio than SVB. This is justified by SVB's higher risk profile. It has a concentration of loans to the venture capital and tech industries including many outside of its market area.
The average return on equity in the second quarter of 2014 was 13.84%, well above its average peer. The Bank has accomplished this through much larger average branch size, a lack of advertising and lower branch rent. The average branch had a massive $731 million of deposits on June 30, 2014, well above the peer median which is under $50 million. The Bank does not place any advertising at all, sales are all directly handled by its private client teams. Signature Bank is relatively distinct in that the majority of its branches are not at street level. They can be found on upper floors of buildings where the rent is often half that of the street level. Non-interest bearing deposits are also relatively high, they were 28.9% of deposits on June 30, 2014.
Earnings in the quarter ended June 30, 2014 were $1.48 per share. This included $4.4 million of gains on the sale of securities. Excluding these gains, EPS were $1.44 in the June quarter. This is up 28.9% from one year earlier and represents an acceleration of earnings.
Signature Bank would have a significantly higher ROE if it slowed its growth. Slower growth would require less loan loss allowance provisions and fewer costs for new offices and teams which are not yet profitable.
Signature Bank's non-accrual loans were only 0.21% of total loans on June 30, 2014, well below the peer median. Non-current loans plus other real estate owned to total loans plus OREO was 0.25% on March 31, 2014, well below the peer median of 1.85%. Non-performing loans were low throughout the recent recession proving asset quality held up at a time when many other banks had elevated problem loans or outright failed. Net charge-offs were a nominal 0.02% during the second quarter of 2014.
Tangible common equity was 9.34% of assets on June 30, 2014. This is after a capital raise of $257 million during the quarter. The additional capital was only dilutive by about 5%. Management believes that this may be the last capital raise needed as return on equity is catching up to the growth rate.
While not involved in trading or global banking like some of its peers, Signature Bank does have some risks. One risk is a concentration in multi-family loans, which were 47.7% of total loans as of March 31, 2014. Most of these loans are in the New York City metro area further increasing risk due to the one market. While the New York City metro area multi-family market is currently healthy, and made it through the recession OK, there is no guaranty it will stay that way in the future. However it is the largest MSA in the nation for small business - Signature Bank's target client. Management does have internal limits for multi-family lending.
Regulatory compliance becomes a bigger risk and expense as Signature Bank approaches the $50 billion asset level. At that level the regulators add a whole slew of new compliance burdens to banks.
Higher interest rates will likely slow loan growth significantly. Commercial real estate, primarily multi-family loans are currently 80-90% refinances. As the refi boom fades this source of loans will slow. When interest rates rise, refi's will go away. Management is mitigating this risk by expanding into specialty finance.
Growth Versus Peers
For a growth stock, the biggest question is whether the growth is sustainable. Signature has had growth in excess of 20% for loans and deposits, each of the past six years. Earnings have increased at an average 24.6% rate per year since 2009. Signature Bank has a proven business model that allows it to take market share from larger competitors. There is plenty of room yet to expand within the existing New York City metro area.
Shown below are companies that have had similar growth to Signature Bank. Growth rates are for the last three and most recent fiscal year. Each of these companies had growth that was steady and led by the top line, wasn't a recovery from a recession induced low, and earnings are expected to continue to grow by at least 10%.
|Company||EPS Growth 3 Years||EPS Growth 1 Year||PE|
|Edwards Life (NYSE:EW)||19.4||16.4||30.8|
|WW Grainger (NYSE:GWW)||19.2||21.0||21.4|
|Whole Foods (NASDAQ:WFM)||26.9||16.7||25.1|
Signature Bank has a below market PE ratio when compared to companies with similar growth characteristics.
Signature Bank is a high growth company in a historically low growth industry. While it has some clear risks, risk is below industry averages due to low problem loans and a lack of high risk activity. The stock trades at a lower PE ratio to stocks with similar growth characteristics. My one year price target is $150.
Disclosure: The author is long SBNY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.