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Capital Bank Financial IPO: Where's the Alpha?

rcwhalen's picture




 

 

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!

 

 

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Thu, 09/13/2012 - 12:07 | 2789966 tradewithdave
tradewithdave's picture

"... but is there really any alpha in the markets today?"

To answer Chris' question with a question will there be a new definition of "markets" once sovereignty is fully monetized and the TBTF are fully nationalized (if you can call it that)?  Instead of "a government of laws rather than of men", we get a "market" of men and a manipulation of laws.  Would seem to me there's plenty of alpha (or in the case of Absalon, plenty of Danish) there once you get past the inconvenience of cashing in blood bought liberty.

http://tradewithdave.com/?p=11644

Thu, 09/13/2012 - 11:08 | 2789680 1eyedman
1eyedman's picture

CBF is a horrid company.  a gerrymandered, cobbled together amalgam of 3 failed banks...with the usual fdic guarantees against further losses.  the two main founders are previous BAC internal execs, pure consumer finance (ccards, overdraft fees etc) types.  the main guy was passed over for the ceo gig at BAC when his idea that countrywide is a good investment didnt pan out very well, number two is simply an excel geek, internal number cruncher from bac, who was a fifth third for only a handful of months before they bounced him.    this is a churn and burn ipo for these two and private equity founders, there is no desire for growth or community relationships.  popst ipo i am sure they are praying that iberia/fifth third/suntrust/bbt/bankunited or someother regional or upstart will absorb them, so these two can go out and do it again, with the fdic backing and fractional reserve sytem of fiat from thin air.   

Thu, 09/13/2012 - 10:43 | 2789551 ebworthen
ebworthen's picture

The Financial SPDR ramped up in hopes of QE3.

Bank of America at three times the value it should be at.

I'd bet that Ben won't let the TBTF banks down; if not today then after the election.

FED mandate dictates that small regional banks are the enemy right along with the mattress and precious metals.

Thu, 09/13/2012 - 07:20 | 2788670 disabledvet
disabledvet's picture

M2 is the worst in post World War II history. And your talking "cash flow" analysis? hahahahaha. that's a good one! We've compounded a financial collapse and desperate debt monetization sheme with a MASSIVE expansion of the war effort. That will improve "the cash flow"...but not in the form of money velocity that you would like. this velocity will come in the form of a massive oil price spike (which we already have btw)...which since the USA is one of the world's largest oil producers should mean a significant pop in...certain areas...of the "non-financial economy." needless to say the financial variant is for all intents and purposes DEAD. the only exception is North Dakota which has their own Central Bank...AND the oil to go along with it.

Thu, 09/13/2012 - 07:25 | 2788679 disabledvet
disabledvet's picture

i have discovered a solution to the problem only i see and have seen correctly i might add btw. (no one...and i mean NO ONE has seen this correctly other than me that i am aware of. at least not...PUBLICLY.) If this Administration were to simply pass over the totality of the State to the Army and order a full scale assault into the totality of the Islamic world in general and the Middle East in particular...should it succeed of course...WOULD in my view mitigate the deleterious impacts of this patently hyper-inflationary scheme.

Thu, 09/13/2012 - 10:13 | 2789366 shovelhead
shovelhead's picture

Hmmm,

Carpet bombing the entire planet...

I hadn't thought of that.

Get more pop from that than QE.

Brilliant. Let's do it.

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