Saturday, April 30, 2016

Earnings Guidance? Buy Side Wall Street Says Think Long-Term. Sell Side Wants Tax Rate.

In February, Larry Fink from Blackrock sent a letter to publicly traded CEOs to think long term and to stop giving earnings guidance. Specifically, he said "Today's culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

Let's see if bankers are heeding Larry's call on their first quarter earnings call.

Christian Bolu - Credit Suisse to Goldman Sachs CFO Harvey Scwhartz: "Tax rate was a bit lower in the quarter, just curious how we should think about the go-forward tax rate?"

Schwartz - "In terms of the go forward I guess if I was to give the best estimate, I'd say something similar to last year."

Bob Ramsey - FBR & Co. to BofI Holdings CFO Andy Micheletti: "I guess putting it all together, next quarter you'll have less Block [from acquisition of H&R Block portfolio]; sounds like your loan yields are stable-ish; plus you have some lift from the equipment finance; and deposit costs maybe tick up with a little growth. Does that put you somewhere in the ballpark of 4%? Or what is the right range for next quarter?"

Micheletti: "Yes, Bob, I think we're still in that 3.80% to 4% range. I would lean to the higher end of that, given where we're coming out, without the Block impact. But certainly in the 3.90%s would be fair."

Michael Rose - Raymond James & Associates to BB&T CEO Kelly King: "Can you give us your thoughts, in light of the environment, in terms of what we could expect for the efficiency ratio"?

King: "I think we will end up this year with improvement. It may be in the 57ish kind of range. Pretty confident about that."  

Dave Rochester - Deutsche Bank to Great Western Bancorp CFO Peter Chapman: "And then just one last one on the margin. Just trying to get your sense for the trend that we should see from here?"

Chapman: "Not much change really to what guidance we have given in the past. So as we have said, Dave, I think if rates remain low, if it ticks down a point or two a quarter, then we wouldn't be surprised with that." 

Chris McGratty - KBW to UMB Financial Corporation Chairman & CEO Mariner Kemper: "And given the stock movement, should we be assuming that those 2 million shares [stock buyback] will be used kind of consistently through the year?"

Kemper: "You know, all I can really tell you is that we certainly think we are very thoughtful about how we think about how to deploy our capital. I know you want more but that is about all I can give you."

Amen Mariner!

To be fair to these banks and their executives, equity analysts bombard them with questions each quarterly call to help them with their projection models. What are they to do? 

In the spirit of Larry Fink's comments and wishes, as one of the largest investment funds in the world, and to be consistent with my belief that managing for the long-term opens doors to investments that can transform your financial institution for an enduring future, here is a sample analyst question and a proposed answer.

Joe Spreadsheet - Bank Stock Investment Firm, Inc. to Chris Evert, CEO of Schmidlap National Bank: "So, Chris, I have this spreadsheet in front of me and I have to enter in an effective tax rate to spit out net income projections. I don't want to be surprised next quarter when I make my estimates, what number should I put in cell F72?"

Evert: "Joe, our long-term strategy has been to transform our bank into a core funding machine, and away from the asset-driven strategy that resulted in large amounts of wholesale funding. As we make this strategic transition, our loan to deposit ratio will fall and, if successful, will result in greater margin as a result of lower cost of funds, offset somewhat by a lower yield because we are becoming more liquid and more assets will be in our investment portfolio. We'll manage taxes from there. Good luck to you buddy on cell F72."

How do you think we can transition from this "here's what we promised the investment community next quarter" to using the investment community to give us discipline in executing long-term strategy?

I'd like to hear from you.

~ Jeff

Bonus: Lloyd Blankfein, CEO of Goldman Sachs, talks about Fink's letter on CNBC Feb 3rd.

Saturday, April 09, 2016

VBlog: Three Ways to Remain Close to Customer Using the Bank Division Approach

My western swing teaching Bank Profitability to the Oregon, Washington, and Utah Bankers' Associations Executive Development Program spurred a lot of discussion on the multi-bank charter strategy and how to grow over large geographies yet empower local decision makers and remain close to the customer. 

Here are three ideas from me. How about you?

~ Jeff

Saturday, April 02, 2016

Bankers: How Should It Be?

I have been sitting on an airport tarmac for 45 minutes. Twenty-first in line. Waiting for a re-route from the tower to avoid the rain drops. Such is the way that it is.

But how should it be?

In banking, do we ask ourselves how it should be?

My firm analyzes bank processes to identify how it is, versus how it should be. But the question goes deeper than how a wire is done versus how it should be done. Answers are typically “it depends”. And what it depends on is in the eye of the beholder. Is the beholder the employee? The customer? The regulator? The shareholder?

Last year I did a blog post Build Your Own Small Business Loan Platform. In it I described having a series of options to fund small businesses. Some options were on the bank’s balance sheet, some not. What the post does not say is just because you could advance a loan to the customer, doesn’t mean you should.

Take the following example:

Suppose Jane and John Doe, owners of J&J Bikes, come into your bank for a mortgage loan. The bike shop has been doing well the past couple of years and the Doe’s want to upgrade their lifestyle into a bigger house.

So they find one. And come to your bank to finance it.

Your bank has a robust menu of mortgage loan programs. And the Doe’s are pushing their limit on loan-to-value, and debt-to-income. But based on the last two bumper years at the bike shop, they are feeling pretty good about their future and moving to a new, tony neighborhood.

You recognize that the Doe’s business is cyclical, and suffers revenue setbacks during recessions. Their ability to service the mortgage payments on their dream home would be significantly impaired if their revenue dropped as little as 20%.

But they would qualify for the mortgage with one of your loan programs. Since your bank sells the mortgage to investors, and you would meet the investor’s underwriting criteria, the risk of the Doe’s defaulting would fall on the investor. And your mortgage originators only get paid on closed loans.

Do you do the loan?

How it should be…

A relationship driven bank would be concerned about more than the risk of the investor putting back the loan to the bank. It should be concerned about the potential downward spiral of the Doe’s should the bike shop befall hard times and they can no longer service the mortgage.

The Doe’s are not the financial experts that know what would happen if they can’t make the mortgage payments. You are.

So you counsel them on the pitfalls of pushing their financial limits to live in a large home. Values of larger homes fall more in recessions because buyers become scarce. So if they can’t make payments due to a recession impacting their bike shop, they may not be able to sell their home at its current value either.

You tell them to look at past recessions, and the bike shop’s decline in revenue. And look at homes where they can sustain the mortgage in hard times.

I’m not suggesting telling them no, you won’t do it. But be the financial counselor your strategic plan wants you to be. The Doe’s may not appreciate your advice initially. But you would be their trusted advisor for a long, long time.

Or you can put them in that new high LTV loan program from your aggressive investor so you can pay your originator and hit the budget.

How should it be?

~ Jeff