Capital Bank Financial IPO: Where's the Alpha?
Yesterday an IPO priced for Capital Bank Financial (CBF), a small FL bank holding company which was once known as North American Financial Resources. Some of the units of CBF once traded under the ticker “CBKN.” Of note, despite the IPO this week, the bank still has not undated its web site. With the name changes and also the formation of a new BHC with a new RSSD ID #, there could be some confusion among investors.
CBF was rated “A+” by The IRA Bank Monitor as of 2Q 2012, reflecting the bank’s generally excellent score in the quarterly stress test survey conducted by Institutional Risk Analytics. The stress rating is a safety and soundness indicator meant to inform depositors making asset allocation decisions. The bank has almost 12% tangible common equity and a relatively low risk profile. You can see the latest profile for CBF at www.irabankratings.com under "North American Financial Resources." The new name and ticker wil be updated shortly.
Indeed, the risk profile of CBF is so low that the equity returns are quite mediocre. While the bank has an overall stress score of 1 from IRA, thus the “A+” rating, the stress score for equity returns is 2.3 vs. 1.7 for the industry. This elevated stress score is due to the fact that the bank has an ROE in low-single digits, half a standard deviation below its asset peers.
At the end of Q2 2012, CBF reported a default rate of just 14bp, well-below the peer group average. But this low rate of charge off is also reflected in the poor equity and asset returns. While the low risk profile of the bank generally results in a RAROC of 23%, CBF appears to be under-levered. Indeed, in the Economic Capital model published by IRA, the bank shows most of its risk in securities, not lending.
CBF had a Texas Ratio of 0.58% as of Q2 2012, one reason why the more comprehensive public data CAMELS rating for this bank is substantially worse than the stress score. For example, troubled loans equaled 13% of total loans, suggesting that the bank may face significant credit issues in the future. This is one reason that the poor ROE is a concern.
The pricing of the CBF IPO was 0.7 x tangible book, which pretty much tells you want you need to know about this $6 billion asset FL bank. One perspective could be that the offering represents good vale at this level, but another might be that the bank is a modest performer and really does not yet deserve a better multiple.
But the larger question is whether a roll-up strategy focused on community banks really offers a compelling value for investors. My view continues to be that the best risk adjusted returns from all US banks are to be found in the preferred securities of banks because the cash flow to me is 2-3x the cash flow from the common.
Of course you could argue that the preferred are an inferior investment because you miss the “alpha” available from the common, but is there really any alpha in the markets today? Rolling up community banks with mid-single digit ROEs and flat to up small revenue growth does not strike this analyst as a very compelling opportunity in terms of alpha but may offer some significant risk-adjusted returns. Finding mid-beta investments that offer good cash flow strikes me as a better use of time than chasing alpha which may not really exist. Next!