With the safe, secure big Canadian banks and their growing dividends, it's so hard to talk folks into taking a flier on one of the cheap south-of-the-border financial institutions that's slowly dragging itself out of the morass. Fair enough.
How, then, about new banking companies that have cherry-picked the best elements of failed financial institutions while sloughing off the nasty bits to the U.S. taxpayer?
It's an emerging subsector. BankUnited Inc., a roll-up of troubled institutions in New York and Florida, has traded on the New York Stock Exchange since early last year. Two others, Capital Bank Financial Corp. and National Bank Holdings Corp., completed their initial public offerings last week.
Certainly, the biggest profits may have already accrued to the financiers who created these companies on the cheap, then brought them to market at a gain. Nonetheless, each seems reasonably priced compared with its older peers and their legacy balance sheets. And as more investors discover the names, the three might be intriguing opportunities to bet on the slow but steady U.S. banking recovery.
BankUnited illustrates how these companies came to be: CEO John Kanas, an industry veteran, formed a holding company in April, 2009, with nearly $1-billion (U.S.) in backing from large private-equity firms. The next month, it acquired the seized BankUnited from the U.S. Federal Deposit Insurance Corp. (Toronto-Dominion Bank was reportedly one of the unsuccessful bidders.)
While it took on "substantially all" of the troubled Florida bank's assets, Mr. Kanas's company entered into a "loss sharing agreement" with the FDIC that greatly limited the downside. The company subsequently moved into New York with a second bank purchase.
How has it done? Depends on how you measure. It went public in January, 2011, at $27 a share; it's a hair under $25 today. The S&P Regional Banking ETF is up by double digits over the same period. The discrepancy is greatly narrowed, however, on a year-to-date basis.
In part, that's because of speculation the bank's 90 Florida branches – it's the second-largest in the state by number of offices – would make a nice addition to any number of larger franchises. (TD is still interested, the New York Post reported last month.)
Has the merger mania made the shares too pricey? Not clearly so.
I used Standard & Poor's Capital IQ to pull a list of 27 regional banking companies with assets between $8-billion and $16-billion, since BankUnited falls roughly in the middle of that range. BankUnited is just slightly above the median in its forward price-to-earnings (P/E) ratio, and falls below the median in both trailing P/E and price-to-tangible-book-value, a frequently used metric for financial stocks. At the same time, its loan quality is markedly better than many members of the group, based on measures of its troubled loans as a proportion of the balance sheet. The valuation may be due to Wall Street analysts' conservatism, as they're concerned about how BankUnited will fare as it moves past its government loan guarantees. But Morgan Stanley's Ken Zerbe, who has an "in-line" rating and $26 target price, admits he and his colleagues at his firm are modelling much slower loan growth than management is forecasting, and "if we are wrong, there could be sizable upside to the stock."
Capital Bank Financial, also based in Florida and operating in five southern U.S. states, and National Bank Holdings, which operates in three western states, are too new to the markets to generate analyst coverage. They're also earlier in their life cycle, so their trailing P/Es aren't appealing. But, compared with 33 similarly sized peers, they are very nearly the cheapest by price-to-tangible-book. And both had intended to price their shares in the low $20s; thanks to last week's choppy stock market, they had to price in the high teens instead.
That seems to leave some room to gain – as more investors appreciate just how much a fresh start can mean in U.S. banking.
BankUnited Inc. (BKU)