Inside Wall Street: Who Needs Banking Giants? Tiny Signature Is Outrunning Them

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

This is a banking David and Goliath kind of a story, with Signature Bank (SBNY), a tiny full-service bank operating in and around New York City, playing David. Signature has outperformed the giant supermajor institutions, including JPMorgan Chase (JPM) and Bank of America (BAC). The pint-size Manhattan-based bank's market capitalization of $2 billion is dwarfed by JPMorgan's $161.5 billion and BofA's $126.4 billion.

Still, Signature has done far better for investors this year, rising from $30 a share in January to a 52-week high of more than $50 a share on Dec. 28. JPMorgan, on the other hand, swooned from a 52-week high of $48 in mid-April to $42, and BofA declined from a 52-week high of nearly $20 in mid-April to $13.

One explanation for this wide disparity stems from the financial meltdown, which resulted largely from the gigantic losses that the major financial houses suffered. In casino-like fashion, they took huge risks in derivatives, trading in notorious instruments such collateralized debt obligations.

Mainstream Banking Products

On the other hand, Signature's operations through its 23 offices in the metropolitan New York area can best be described as your basic, traditional and transparent type of banking: No derivatives or CDOs.

Signature focuses mainly on providing its small-business clients with mainstream banking products, including investment, brokerage and wealth-management services. Its total assets of $11 billion include deposits of $9 billion and $1.7 billion in assets under management. Signature has only about $4.9 billion in loans.

Signature's "deposit-driven and high-end lending business model remains intact despite the return to health of its larger New York City-based competitors," says Erik Oja, banking analyst at Standard & Poor's. Rating the stock a buy, he sees Signature's capital levels as strong relative to its peers, with nearly $920 million of tangible common equity -- equal to 8.41% of tangible assets. That, Oja says, is well above its peers.

"Strong Across the Board"

He figures that although Signature's stock is trading above its rivals on price-earnings multiples based on his 2010 and 2011 earnings estimates, the stock should trade at a significantly higher premium to its peers. Specifically, the analyst notes that Signature's growth rate and capital levels are well above those of its larger competitors. He forecasts the small bank will earn $2.48 a share in 2010 and $3.06 in 2011, way up from 2009's $1.31.

Signature's third-quarter results beat Wall Street's forecasts, demonstrating the bank's solid financials. Earnings for the quarter ended Sept. 30, 2010, jumped 80%, to $27.4 million, or 66 cents a share, from $15.2 million, or 37 cents a share, a year ago.

"The results were strong across the board, with better earnings asset growth than we modeled," says Bob Ramsey, analyst at FBR Capital markets, who rates the stock as outperform. Signature's continued significant growth "underscores the strength of its unique strategy and business model in an environment where most depositary institutions aren't growing or are even shrinking their balance sheets," says Ramsey. In fact, Signature's deposits grew 7% sequentially in the quarter and climbed 33% from a year ago.

Higher Stock Target

President and CEO Joseph J. DePaolo attributes the bank's success in winning new core clients away from some of its competitors to the company's "quality of service and strong financial condition." Signature places its priorities, he argues, "on depositor safety, first and foremost."

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Jason O'Donnell, analyst at investment firm Boenning & Scattergood, notes that for the first time since the economic downturn began, Signature's "credit quality showed unmistakable signs of improvement." So, O'Donnell recently raised his price target for the stock to $55 from $46.

Evidently, Signature has proved that sticking to its small corner of a gargantuan industry enables it to provide effective banking services to its clients, thereby producing sizable earnings growth and enhancing shareholder value.

Indeed, investing in a small bank focusing on a niche market as large and as challenging as New York City and delivering traditional banking the old-fashioned way may be the best way to cash in on financial institutions.

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