Inside Wall Street: Banking's organic growth stock
Top-performing Signature outpaces the majors in deposits and loans.
A growth stock in the moribund banking industry? Hard to believe, as the beleaguered banks have been lackluster performers, at best. But one that stands out is Signature Bank (SBNY), a mid-cap regional bank which, despite its small size, has been posting continued record earnings growth.
An industry-leading, annual loan-growth of 36% and profit-margin stability are fueling this New York commercial bank's robust performance. It's one of the few stocks in the besieged banking industry that is thriving in spite of the weak economy, advancing to $61 a share, way up from a 52-week low of $44.07.
"Signature Bank is a bona-fide growth story that continues to deliver above-average profitability and credit quality," says Anthony Polini, banking analyst at investment firm Raymond James & Associates, who rates the stock as "outperform."
"For years, Signature Bank's net interest income, which is almost 92% of 2011 net revenues, has been driven by strong-growth of interest-bearing deposits," notes Erik Oja, analyst at S&P Capital IQ, who rates the stock a "buy." The bank reported record second quarter earnings of 96 cents a share, which beat Wall Street's consensus forecast.
The bank's "growth momentum continues," says Christopher McGratty of investment firm Keefe, Bruyette & Woods. But despite its growth, exceeding "even our bullish expectations" in the second quarter, says McGratty, "we were encouraged by the expense discipline and believe operating leverage potential exists in the coming quarters."
Signature Bank has assets of $16 billion, $13 billion deposits and $8 billion in loans. It caters mostly to business clients, including real estate management companies, retail establishments, accounting and law firms, and medical professionals. Signature Bank has 25 private-client offices and a network of 80 banking teams in the greater New York City area. It also provides investment, brokerage asset management, and insurance products through a subsidiary, Signature Securities Group.
Bob Ramsey, analyst at FBR Capital Markets, notes that Signature's new specialty lending and equipment finance unit is ramping up quickly, contributing more than $200 million of the total $665 million loan growth. He has raised his earnings estimates for 2012 to $3.74 a share from $3.67, to reflect the second quarter's strong results, and maintained his 2013 profit forecast of $4.30.
Rating the stock as outperform, Ramsey says it is trading at a "deserved premium to its mid-cap bank peers, given Signature's growth prospects, profitability, credit and capital ratios, and attractive footprint."
He has a 12-month price target for the stock, currently trading at 13.5 times his 2013 profit estimate of $75 a share. Signature's mid-cap peers trade at a 12.7 times their 2013 earnings estimates.
Can Signature maintain its fast-growth trajectory? It may be difficult to maintain such a rapid rate of growth as the bank gets larger, says Ramsey. "But we expect a strong double-digit pace for years to come," he adds. The recent creation of Signature Financial, a specialty finance subsidiary, added a third of loan growth so far in 2012, a brisk pace in the near term, he notes. The bank's loan growth outlook, says Ramsey, "has never been better."
One likely addition to Signature's allure: Rumors continue to swirl that it may attract a buyer among the major global banks. "Signature's excess core deposit funding, strong growth and clean credit quality would be very desirable to many buyers," says Ramsey. But he considers such an exit a distant prospect.
To be sure, Signature is an attractive acquisition target. It is "one of the best organic growth stories in banking and has grown its loan and deposits 31% and 19%, respectively, over the past year," Ramsey notes.
Indeed, Signature's valuation can only improve as mergers-and-acquisition premiums return to small-cap banks, says Ramsey.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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