The traditional banking industry of the 20th century has been all but extinguished. Today, most financial firms focus on doing everything at once, and the results of that approach, to be frank, have been disappointing. We avoid most financial stocks not because we are bearish on the economy, but because we wish to avoid the complexity and "mystery" of global financial firms. That is why we hold positions in just 2 financial companies. And we would like to highlight one of them today, for we believe it is an overlooked gem of the banking sector.
City National (CYN) is a mid-size regional bank based in Los Angeles, with 79 branches across California, Nevada, New York, Nashville, and Atlanta. The bank currently holds over $24 billion in assets. City National reported no losses during the financial crisis, due to its conservative nature, which is just one of the reasons we are bullish on this stock. We delve into our thesis below.
Premium Performance Deserves a Premium Valuation
Many analysts on Wall Street, and many contributors here on Seeking Alpha regularly argue that bank stocks [meaning JPMorgan (JPM), Citi (C), Bank of America (BAC), etc...] are all "screaming buys" because they trade at enormous discounts to book value. We, however, do not see it that way. To us, such large discounts to book value indicate weakness. Investors do not trust what is on the books of these banks, and it is possible that they may never again trust stated book values, given what transpired during the financial crisis.
Of the Big 6 U.S. financial companies, it is no coincidence that the company seen as the soundest and strongest, Wells Fargo (WFC), is also the only one to trade at a premium to book value. Over the past 5 years, Wells Fargo has lost just over 8% of its value. JPMorgan has lost over 30%, Goldman Sachs (GS) has lost over 57%. Morgan Stanley (MS) and Bank of America have seen losses of over 80%. And Citigroup has lost almost 95% of its value. Deep discounts to book value mean little when the true book value is so difficult to calculate.
City National trades at a premium to its book value of $41.77 (per its latest 10-Q), with the stock currently valued at 1.16x book. We view this as a bullish sign, for it means investors trust City National's book value (not that it is difficult to calculate, City National little besides loans and trading securities).
On a price-to-earnings basis, City National trades at a trailing P/E ratio of 14.59 (as of this writing). That is a premium to most other large and regional banks, but we view it as warranted. Earnings at City National grew 17% in its last quarter, and the company is set to grow 2012 earnings by 11.2%, based on consensus Reuters estimates. The bank will report second-quarter 2012 earnings in the middle of July.
City National has solid financials, with several figures deserving mention. City National grew its core deposits by 12% in its last quarter, to $19.521 billion. On its own, that figure, while adequate, means little. What is worth mentioning is that core deposits comprised 97% of City National's total average deposits in its last quarter. And non-interest bearing deposits comprised 49% of total deposits, an extraordinary figure for the banking industry, and one that allows City National to have the lowest funding costs among the 50 largest American bank holding companies (for the record, City National is the 41st largest bank holding company in the United States).
Simplicity and Affluence: A Winning Combination
City National stands out from the money-center banks for 2 reasons. The first is simplicity. And the second is affluence.
City National has no capital markets division. It does not dive into the derivatives markets. City National is a plain vanilla bank that takes deposits, makes loans, and provides cash management and treasury services to businesses. The bank has stayed out of the regulatory spotlight, because there is nothing exotic or complex going on at the bank to warrant increased regulatory scrutiny. Tier 1 common capital stands at 10.2% as of the company's latest quarter. And City National will not have to worry about Basel III requirements, for the bank is small enough that it is beneath the Federal Reserve's requirements for the implementation of Basel III standards.
City National also highlights the increasingly bifurcated nature of the American economy, where businesses that cater to either the high-end or low-end doing well. City National is a bank that targets affluent customers. In its latest investor conference presentation, CFO Chris Carey highlighted the fact that City National's target customer is one who has over $1 million in investable assets and an annual income of at least $250,000. This emphasis has insulated City National from the worst of the downturn. Given that City National's main market is California, some readers may be wondering how City National can be weathering the "so-so" economy of California. The answer lies in just exactly where City National concentrates its California exposure. As CFO Chris Carey reminded investors in his latest presentation, City National core market in California are the dense coastal population centers, which have fared much better than California as a whole (especially Silicon Valley and the Bay Area). The bank's emphasis on affluent customers has paid off, and it is reflected in the one of City National's top growth drivers: its wealth management unit.
Wealth Management: Success for Clients, Success for City National
Wealth management is responsible for 15% of City National's revenue, and the bank is investing aggressively to grow that business in the quarters and years to come. At the end of April, City National announced that it was acquiring Rochdale Investment Management, bringing City National's total assets under management and administration to $60 billion. The deal will be accretive to 2012 earnings, and should lead to more contribution in 2013 and beyond.
CFO Chris Carey says that there will be two drivers of growth in the wealth management unit. The first is rising interest rates, which is something that the bank has to wait for, because it is a factor beyond its control. The second, however, is one that the company can control, and one that we are confident the bank can deliver on. CFO Chris Carey, during his latest investor presentation, was upbeat about City National's wealth management business, stating that, "our wealth businesses are at a point where the additional revenue that we bring into them, they're big enough that a significant portion of that falls to the bottom line. So where we can make an acquisition it just really adds to that, but even as we just grow the business the marginal profit on that is higher." City National's wealth management business is in a position where acquisitions have a meaningful impact, and allow the bank to boost its margins.
Conclusions
We believe that investors should consider City National if they wish to have exposure to the financial sector. This bank does not dabble in exotic derivatives, or the capital markets. It is a plain vanilla bank with an emphasis on high net worth individuals and businesses, and it is a model that has served the bank well, and one that we think will continue to in the future. We believe that there is far less risk in City National than the large, global money center banks, which is why this bank is one of our few financial stocks. As City National continues to execute on its growth strategies, all while maintaining its conservative culture, we think the company will amply reward its shareholders over the long run.
Disclosure: I am long CYN.
