Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.
Last year may have been a lousy year for bank stock investors, but it was a great year for people who observe and write about banks. I mean, there was something going on every minute. Whether it was the pancaking of the yield curve, or the latest presidential temper tantrum directed at the besieged Federal Reserve chairman, or the burgeoning battle over CECL, or the attempts on the part of regulators to "right-size" oversight of the various segments of the industry — it was more fun and more active than a barrel of monkeys.
Unfortunately, not all of the coverage was either smart or valuable. I have grown especially tired in recent days of all the hand-wringing over the "real" intentions of Fed Chairman Jerome Powell. Is he a hawk? Is he a dove? Is he a dovish hawk? Does he really mean that there is a "long way to go" before we reach the neutral rate — or did he misspeak? I want to shout — he's a new chairman who has inherited the worst set of monetary choices since (at least) Paul Volcker, and he's learning to modulate his pronouncements so as not to overly alarm the markets but at the same time to present a realistic picture of the Fed's path forward. Now leave him alone and go back to more important things — like Alexandra Ocasio-Cortez and her dance moves.
There were two occasions of note late last year, and while they were company-specific — daylong meetings with analysts on the part of the management teams at BB&T Corp. and South State Corp. — there were discussions at both that hold valuable insights for the banking industry as a whole. For the first time in my memory, BB&T CEO Kelly King spoke at length on the new realities of banking and how his formerly merger-centric bank must respond. It is a reformation of sorts as BB&T management turns its attention from the next deal to remaking the company into a simpler, more efficient entity. King reiterated his company's emphasis on generating capital to be returned to shareholders, and it is no surprise to me that BB&T's stock performed relatively well during the chaotic days of December 2018.
Robert Hill of South State had a tougher task at his analyst day in New York on Dec. 12, 2018. Not only had the market correction set in with a vengeance — the S&P 500 had already declined 5% since the beginning of December — but Hill's stock was already setting a path for a 31% decline in 2018 and a marker as one of the worst-performing of the formerly high-flying large Southeastern community bank stocks.
Let me say up front that I am a huge admirer of South State and its management team, and this is a stock that I hope will become better known to the bank stock investor class at large in coming years. Due to its size and market cap — roughly $14.5 billion in assets and $2.3 billion in market value — it remains a bit of a cult stock but will doubtless become more widely held as it evolves and grows.
The bank's real claim to fame is the quality of its management — many of whom came from the legendary, pre-First Union Wachovia — and its hereditary devotion to credit quality and consistency in its results. And characteristically, Hill did not hesitate to address the issues with the bank's stock performance, which he sees as stemming from the sometimes rather wide gap between reported results and normalized earnings (and the net interest margin, most specifically) as a result of the purchase accounting accretion that has accrued from a series of deals since the Financial Crisis.
Ah, yes — deals. As Hill and King can readily attest — and so now can Terry Turner of Pinnacle Financial Partners Inc. and even Kessel Stelling of Synovus Financial Corp. — there is a downside to even the advantageous deal-making that has taken place over the past few years. It seems that bank stock investors have grown less enamored of the deal makers in recent months, perhaps due to coming concerns about a recession or slowing loan growth or the shape of the yield curve. Or perhaps there is simply a fear that the banking industry is about to repeat the mistakes of the past and do something stupid — although in a much smaller way and with a much smaller element of systemic risk — but the about-face has been rather remarkable.
Hill said something early in his investor day commentary that stopped me in my tracks — he acknowledged the banking industry's long historical record as first a creator of shareholder value and then as a destroyer of the same. That is the first time that I can recall in my 37-year career that a banking executive has explicitly stated a fact that has long been known to investors, and it was to me an indicator that this time may indeed be different. I am not able to gauge at this point whether Hill's view is universally held by his Southeastern banking peers, but I'd guess that the lessons of last year's stock performance have not gone unnoticed in other community banking centers.
One thing that is mostly missing from the equation this time around — and I say this with a great deal of thankfulness and awe — is CEO ego as a large motivator behind mergers. One need only to think back to the June 30, 2005, announcement that Bank of America Corp. would buy credit card company MBNA for $35 billion (yes, that's with a "b") — a deal that we subsequently learned was largely designed to keep it out of the hands of Ken Thompson at Wachovia — and the subsequent dissolution or sale of most of those expensive assets in the wake of the Meltdown to see how destructive to shareholders the CEO battles were. I can only wonder: What were we all thinking? Was it a mass delusion — or just a different time?
Long gone are the efforts to sell the attractiveness of "strategic" deals in the banking industry at a time when technology is increasingly replacing physical presence as an instrument of customer attraction and retention, and even if the nation’s largest banks were un-caged to do sizable bank deals again, it's hard for me to see how they could be justified. I suspect that even BB&T's King — who still seems at times to speak wistfully of his company's ability to do regional bank deals of size — has an increasingly hard time justifying these in his own mind, and Hill made it very clear that South State has work to do with both its infrastructure and its investors before putting a toe back in the deal-doing pond.
So have we finally had an outbreak of common sense in banking, or is this just an interlude before yet another round of deals? I'm no longer young enough or naive enough to believe that there will not be future follies — it is banking, after all — and a recovery in stock prices will likely see a resumption of deals in the mega-community segment. But I also think that there is an equal chance that banks like BB&T begin to think about the parts of their franchise — both branches and otherwise — that they might want to sell and that leaner and meaner will be the way to heightened profitability in coming years — even if that means smaller.
I also saw the news item last week that there were no bank failures in 2018, for only the third time since the Federal Deposit Insurance Corp. was founded in 1933. Let's hope that this is the beginning of the Reformation, and that this milestone marks an era of continued true value creation by banks.