tag:blogger.com,1999:blog-235433516644980443.post6153671549353311124..comments2024-03-27T05:08:10.195-04:00Comments on Jeff For Banks: Core Deposits Drive ValueJeff Marsicohttp://www.blogger.com/profile/12153599647481141591noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-235433516644980443.post-41255553465969183702011-03-26T13:11:47.171-04:002011-03-26T13:11:47.171-04:00Serge,
Sorry the above comment just posted today....Serge,<br /><br />Sorry the above comment just posted today. It was caught in my "spam" comments. Not sure why. But it is an important one to the dialogue.<br /><br />I'm not sure you and I are going to agree on this one. Common ground may be: the relationship management component could very well result in lower cost of funds, as FIs focus on customers that are willing to bring significant pieces of their business to the bank.<br /><br />~ JeffJeff Marsicohttps://www.blogger.com/profile/12153599647481141591noreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-78349275291949010682011-03-16T01:35:14.832-04:002011-03-16T01:35:14.832-04:00Jeff - As you know correlation is not the same as ...Jeff - As you know correlation is not the same as causation. That is, just because two factors appear to be correlated, does not necessarily mean that one causes the other. In this case, it is not a foregone conclusion that low COF causes high PE and P/B ratios.<br /><br />This is critical, because many in the Banking industry seem to hold the title of your post as gospel. I disagree. I believe that what is important is developing a business model that generates strong and consistent returns with robust growth. Core deposits are part of the overall model, but they are certainly not the central actor that determines value creation.<br /><br />In fact, based on my experience from prior life, value creation - as measured by Total Return to Shareholders (TRS) is isolated into 4 components - market returns, industry returns, interest rate impact and management contribution. Clearly, managmeent can claim credit for only the last component. <br /><br />The management contribution to returns, can then be dissected into value drivers, which include NIM as you indicate but there is also the impact of Fee Income (which is substantial for some of the larger Community Banks and Regional Banks), the overall opportunity as defined by the Bank's footprint (physical and virtual), pricing power, customer profitability, etc..Serge Milmanhttp://bankblog.optirate.comnoreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-37531474920888610602011-03-14T20:11:11.201-04:002011-03-14T20:11:11.201-04:00Serge I understand your concerns about the data se...Serge I understand your concerns about the data set. Controlling for profitability, asset quality, and trading liquidity limits the pool of banks/thrifts measured, particularly in this environment. <br /><br />Eighty percent of community banks revenue comes from spread, and there are only two data points to spread, yield and cost. I focused on those two, and found little correlation to trading multiples on one, and a stronger correlation on the other. <br /><br />Flawed, yes. But I've seen strategic decisions made on dicier data, such as entering a balance sheet leverage program using pre-payment speed assumptions that did not contemplate a falling rate environment, or consultants running around saying the branch is dead.Jeff Marsicohttps://www.blogger.com/profile/12153599647481141591noreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-22582120766128382642011-03-14T18:03:19.802-04:002011-03-14T18:03:19.802-04:00Oh boy… I don’t know where to start. Without bein...Oh boy… I don’t know where to start. Without being too critical of the analysis let me point out a number of fatal flaws:<br />- The sample size is likely skewed and likely not statistically significant. The data used to generate results covered 131 FIs (101 Banks and 30 Thrifts) out of the total population of nearly 7,700 Banks. Because you were looking for market prices, most of the FIs are likely larger than average, given that overall, very few of the 7,700 Banks are publically traded and/or have any meaningful liquidity in their stock.<br />- The analysis implicitly assumes that only two (2) factors influence PE ratios – COF and Yield on Earning Assets. This is, of course, incorrect and thus any conclusions are, therefore, subject to grave concern.<br />- In the end, it is not clear that the thesis was actually proved – that is that Core Deposits drive value. At best, you make the point that low COF may have a causal relationship to higher PE and P/B ratios. However, as indicated above, the analysis did not keep all other things constant, thus, these findings are highly speculative.<br /><br />This would be a very interesting analysis to perform but the analysis is not trivial and requires more than a 'back of the envelope' effort.Serge Milmanhttp://www.optirate.com/banksnoreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-91529528883043101402011-03-14T12:12:44.563-04:002011-03-14T12:12:44.563-04:00The "gas" that allows the car to travel....The "gas" that allows the car to travel...Makes sense!The Soaring Eaglehttps://www.blogger.com/profile/12257972473954196706noreply@blogger.com