Signature Bank (NASDAQ: SBNY) is a solid and stable bank with significant growth potential in the years to come. It can also be a good choice to hedge against inflation thanks to its variable rate loan wallet. The bank has a large moat compared to its peers as it does not have to maintain a large number of branches and this fact helps support its outstanding efficiency ratio. The only reason I’m neutral on SBNY is its current price and low dividend, but the fundamentals and internal factors are impressive.
SBNY is the 42nd largest US bank and a member of the S&P 500 Index. The firm operates 38 private client offices located in New York, Connecticut, North Carolina, and their newest, California. The bank provides services to private corporate clients, their owners and senior executives. SBNY derives the vast majority of its revenue from interest income on loans (now mostly floating rate loans). Only a small portion of their income comes from deposits and non-interest income, so the company relies heavily on its loan portfolio to generate income.
Finances and income
SBNY has significantly increased its net income, deposits and ROE over the past year and a half, and the company reported a similar positive result in the first quarter of 2022. The bank recorded net interest income of 338.5 million, an increase of 24%. quarter-over-quarter from $271.99 million, and a whopping 78% year-over-year growth. Management released fascinating ROE figures. The ROE for the first quarter was 17.44%. However, it should be noted that this was partly due to one-off tax items, but without them the ROE would still have been a high figure of 15.2%. The company could also increase total deposits by 3% from the previous quarter.
There are several reasons behind these good ROE figures. One such factor is that SBNY does not advertise, does not have a massive marketing budget, and, due to its clientele, does not need to maintain street-facing retail branches that are very expensive. It also helps the bank maintain an industry-leading efficiency ratio. (More on that later.) The other major factor, I believe, is the talent acquisition that management has been doing for a long time. There have been many significant mergers and acquisitions in the banking sector recently, such as the merger/acquisition of Webster-Sterling or M&T-People. SBNY has a unique response to these deals to stay competitive: Hire well-qualified teams at the various High Street and Main Street banks. This has worked very well in recent years and these new teams are bringing in deposits and business and helping to grow the bank.
In terms of deposit growth, management reasonably expects more moderate numbers even with new teams in place: “I think $3 billion is a really good quarter, and I think everyone , including us, has gotten used to $10 billion a quarter through 2021, and we don’t expect that to happen. We expect it to be more moderate – Joseph DePaolo – CEO.” However, growth should be sustained and SBNY also expects further growth in its balance sheet. This will help them take advantage of rising interest rates as the bank has restructured its loan portfolio to floating rate loans and higher interest rates will have a positive impact on SBNY’s earning power.
“Our efficiency ratio has improved to 31.8%. We see banks with efficiency ratios above 60% being applauded – Joseph DePaolo, CEO.” He is right. Most banks currently have an efficiency ratio of around 58-60% and an efficiency ratio of 53-55% is celebrated across the market. Almost all of its peers have much higher efficiency ratios. Regions Financial (RF) has an efficiency ratio of 53.17%, Huntington Bancshares Incorporated (HBAN) has an efficiency ratio of 73.30% and Citizens Financial Group, Inc. (CFG) has an efficiency ratio of of 57.82%. However, it should be mentioned that all SBNY peers have a considerable number (800 – 1500) of branches that need to be maintained. I believe this is the moat of SBNY that they can save a ton of money on branch maintenance costs. Additionally, SBNY is one of the few banks that has been able to consistently increase its book value per share over the past 10 years.
However, the company is quite valued in my opinion. It matches almost exactly its 5-year average P/E ratio and is overvalued by almost 50% compared to the sector median. (But the sector median number also includes BDCs, so it’s not as reliable a measure) I think at the start of 2022 the stock was slightly overvalued, but with the 20% price drop since the beginning of the year, it is now fairly valued.
Company specific risks
The smallest risk at the moment, but still worth mentioning, is continued central bank intervention due to limited growth concerns. Since SBNY has restructured its loan portfolio into floating rate assets, rate cuts and government interventions would slow the company’s growth and could even halt it for a short time. A bit bigger risk is the risk associated with commercial loans. Traditionally, residential mortgages are less risky than any commercial loan and SBNY operates in the commercial banking sector, which makes the company riskier than its peers who provide both commercial and residential or only residential loans. The biggest risk I see at the moment is the company’s hiring initiatives. Their business model and future growth is highly dependent on training and retaining qualified people. If the company fails to do so, or if labor issues become a serious problem, SBNY could fall back on its competitors and lose one of its key factors in growing its business.
My take on the SBNY dividend
SBNY is a dividend paying company since 2018. Over the past 3 years, the company has paid consecutive dividends but has no dividend collection streak. Since management announced its first dividend in the second half of 2018, the dividend has been set at $0.56 per share per quarter. According to analysts’ estimates, no dividend increase is expected in 2022, however, the consensus rate for 2023 is a bit higher, indicating a possible dividend increase. SBNY’s payout ratio is sustainable, with management only paying out about 10-15% of its earnings. That’s why Seeking Alpha’s Dividend Security Rating is an A+.
SBNY is a large bank with a very attractive efficiency ratio and great potential for organic growth. Management has been able to continuously increase its book value over the past 10 years, which is an impressive record. I’d rather see a higher dividend, especially with these growth numbers, efficiency ratios and balance sheet expansion. I’m on the long side due to the bank’s fundamentals, but neutral due to its current price and dividend yield.