Casteel Schoenborn Bank Outlook 2012
5 Steps to getting your bank started in Investor Relations
In and Out on Main Street
Casteel Schoenborn Bank Outlook 2012
January 2012
BY Julianne Senulis

As bankers prepare to report fourth quarter and 2011 results, the street is looking ahead to 2012.

As analysts and institutions start picking the banks they want to own when the economy turns, we believe bank executives will be increasingly questioned by the financial community on these topics.

Investors have put in their earplugs to drown out the noise… the FOCUS IS NOW ON FUNDAMENTALS.  After four years of painstaking analysis of reserve builds, securities write-downs, mortgage putbacks, capital adequacy, they are eager to get back to the basics.

Banks are recapitalized, credit has improved, securities valuations have stabilized – and with these improvements has come the long-awaited abandon of valuations based on “normalized earnings.”  We expect institutional investors and sell-side analysts in 2012 to focus on “profitability ability” – simply, earnings power.  Regulatory directives have forced elevated “E” as the new normal in the ROE equation, so renewed investor focus is on the “R” within bank management teams’ control.  What are the sources of sustainable earnings power going forward?  The economy is improving at a slow but perceptible pace.  What level of growth potential is inherent in these sources in a slow-growth environment?

With bank stocks captive under a current macro stronghold, we expect increasing Street attention on attractive bank stock valuations and long term growth prospects. The sector has long been out of favor, but we expect historically low valuations and greatly improved fundamentals to renew investor interest, and potentially very soon. 



Near-term revenue opportunities are limited: margins are compressed, commercial fees are stagnant in a low demand environment, and while retail banks have been redesigning deposit offerings to align profitability objectives with new regulations, realization of any fee income upside is distant.  As such, banks are eager to demonstrate potential for efficiency leverage in 2012.  If they’re not already running lean operations, many banks have announced some sort of program to get there.  But with these announced cost cutting efforts largely priced in, and with the numerator stretched thin, we think analysts will refocus on the denominator: core revenue catalysts. 

  • What’s being done now to ensure sustainable revenue growth in the future? 
  • Where is the balance between cost rationalization and investment for future revenue streams? 



The irony of the industry returning to profitability is that as capital generation accelerates, it actually becomes a burden: it has nowhere to go. 

  • If M&A is sidelined, and regulators retain tight control over dividend hikes and buyback authorizations until stress tests are vetted, what to do with excess capital?  Investors are seeking clarity – even creativity – on this. 
  • How and when will shareholder returns to existing investors be optimized in a more-is-more capital environment?



The current low interest rate environment has been virtually guaranteed to continue into at least 2013.  With this, net interest margins are range-bound in a “new normal” zone in which asset/liability management is receiving renewed attention. 

  • How much room is really left to lower deposit pricing?  We hear many banks assert pricing can still come down.  When and how? 
  • How are banks preparing for potential deposit outflows should the equity markets regain favor?  Basel III enters the mix here, with new short- and long-term liquidity measures to consider.
  • Despite encouraging traction in C&I, lending is sluggish and will be for some time, throughout the whole of 2012 at least.  Securities are the natural parking lot for excess liquidity, but what does an optimized balance sheet look like if rates stay unfavorable for an extended time?



  • How much risk are banks assuming to achieve returns, and at what price? 
  • Are yield pressures driving banks to pursue sub-par credits with ultra-competitive rates and lax structures?
  • Are banks expanding into new lending or business arenas?  How is the risk evaluated and quantified? 
  • Will loan growth come, and where will it come from?  And if it comes, is it prudent?
  • How are reserves being managed? Do releases continue in order to boost  bottom line earnings, or does conservative reserve maintenance gain traction to defend against a double-dip or to support future loan growth?

Fed H8 data shows C&I loans posted 4.5% growth among large banks and 2.1% growth among small banks in the 4th quarter.  Economic indicators point to improving business investment, improving manufacturing data, and growing corporate profits – however, GDP growth estimates for 2012 average around 3.0%.  We expect analysts to examine whether loan growth exceeding GDP growth is prudent.

A number of community banks received funding from the Small Business Lending Fund (SBLF) in 2011 – funding which comes with interest rate incentives for banks that meet minimum lending thresholds. We’ve heard bankers and media alike express concern that the incentives are so attractive they may encourage irrational pricing.  We’ll look for analyst questions regarding deployment of SBLF proceeds.

We also wouldn’t be surprised to hear another question regarding loan growth related to recent strength in the agricultural industry.  How long can it last, and how are the cash flows modeled in underwriting?



We noted at fall regional bank conferences that most banks asserted they are taking market share, rationalizing costs, managing credit, readying to be consolidators – all while generating diminished returns on excess capital and liquidity.  Therefore, we expect continued -- if not greater -- probing by investors as they gauge management and board fatigue from not only the interest rate environment and revenue challenges, but from regulatory oversight, compliance costs, and competition. 

In 2011 weak pricing prevented management teams from selling at irrationally low valuations, while potential buyers were sidelined by concern for the opaque credit risks of would-be sellers.  But if Dodd-Frank and the CCAR tests make their way downstream, as many predict, the future may diminish returns further for small banks.

Will 2012 see bid-ask spreads close enough to bring deals to light?

When does independence lose its allure – or its prudence?

We wonder when outright selling or mergers of equals will begin to make sense. 

Or, when shareholders will begin to ask for it.