A case for investing in small cap banks
by PlanMaestro
Continuing with our most important theme lately, today in Bloomberg there is an interview with mutual fund manager David Ellison. It points out pretty well the case for investing in small banks while noticing other investors worries.
As usual, I do not like the specific recommendations. It looks like most mutual fund managers share for public consumption only their most sanitized ideas. So as consequence the recommendations have little edge and are only slightly undervalued. Pretty understandable: little to gain, much to loose
On turnarounds
David Ellison learned a simple lesson from legendary mutual-fund manager Peter Lynch as a young bank analyst at Fidelity Investments in the 1980s: If things at a company are getting better, you want to own its stock.
On banks today
We’re in the process of going from ugly to OK in banking. If you ride the right horses, you will do all right
This is the best time to be making loans I have seen in my career
Bad loans across the industry will be paid or written off over time and replaced by newer and better ones. Banks are lending to creditworthy customers and earning higher profit margins after former competitors such as mortgage companies were wiped out in the financial crisis and housing- market decline
On survivors
The institutions that have survived to this point will rise from the ashes
Smaller banks have fewer moving parts. These guys are the basic American lenders. They will grind through it
A continuing shakeout will eliminate weak players and allow the surviving institutions to gain size and strength. Consolidation will provide greater benefits to small banks because some may be able to double or triple in size
On the new regulatory bill
Would have a limited impact on small banks because they don’t invest in hedge funds or engage in proprietary trading, activities the legislation is designed to restrict. The overhaul will create uncertainty for larger banks without crippling their profits
On management in turnarounds
Ellison recalled that he once hesitated to tell Lynch to keep a bank stock in the portfolio because he didn’t like the company’s management. Lynch listened to Ellison and replied, “But do you think the company is getting better?” When Ellison said yes, Lynch decided they should hang on to the stock. “I learned a lesson,” Ellison said. “People matter. Profits matter more.”
On the economy
An economy that expands 2 percent to 3 percent a year will be enough to support an improving credit climate
Variant Perceptions 
I guess my question is, what happens to CRBC should GDP not grow 2-3%? I’m not a doom-and-gloomer, but I wonder how long we can prop the economy up on extended unemployment benefits, ZIRP and nationalization of mortgages. Thanks for your reports on CRBC, I am considering buying it right now.
A Japan scenario, long protracted recession but no depression, is good for banks. Banks just need the economy to do bad at a slower rate, at that is what is happening. Check at Charting Banking how net interest margins are improving. So if you find a bank with low and improving NPAs 2 years into this recession (and low C&Ds) it is probably past the worse even if things continue to be so-so.
And most businesses are showing record profits. Small banks are more dependent in businesses than consumers. and they have not even started lending. Several, including CRBC, have loans over deposits well below 100% and going lower. New loans are very profitable but many of them are taking things conservatively.
You don’t happen to know where to find CRBC’s loan to value ratios on its performing profits do you? I can’t seem to find it, and I’ve looked/skimmed through the most recent press release, conference call and 10-Q. Sorry if this is a simplistic request.
Thanks in advance.
That information is only seldom available
I meant performing assets, but I’m sure the answer is still the same. I used to follow EWBC, and I know they used to provide that every call. Thought there might be a chance CRBC would disclose it. Maybe I’ll try to sneak into the conference call and ask it…. Thanks.
From bankregdata’s closest 99 peers, I found UABK to be pretty cheap. I cannot find its SEC fillings from either scottrade or google finance though. Want to take a look?