I started investing in banks over 30 years ago and I often get asked what got me so interested in banks. While I eventually discovered the reasons banks are good investments, at first it was by coincidence.
The first bank I invested in was in Reno, Nevada. We became the largest investor, and it was an incredible success after it went public. This investment was even more successful after a larger bank bought it.
In 2015 I contacted a superstar banker who started his career working at a two-branch bank, built it to $18 billion in assets, took it public,and sold for it for $3.5 billion 18 years ago. I also reached out to a friend who had experience as an investor and fund manager at an investment firm. Our goal was to assemble a team consisting of an outstanding bank operator who is an expert in every aspect of banking and had completed successful acquisitions and a knowledgeable, experienced fund manager.
I had been a cowboy investor and never had a team of a bank operator, analyst and fund manager. If we assembled an expert team, alongside a wonderful group of investment partners, we could develop an outstanding disciplined investment process and leverage our combined contacts. We launched our first bank fund in 2015. Today, we have several bank funds with various strategies with an outstanding team and an excellent disciplined process.
Our team invests in high-quality banks — but under the right circumstance will consider turnarounds that have already turned — in very desirable markets with good business models, a great culture and exceptional management. Identifying multiple banks that would possibly be interested in that bank if it ever sold is advantageous. Multiple buyers create more demand and, potentially more value.
There are three major reasons banks buy other banks. One, there are significant cost synergies; a bank that has a platform that buys another bank can eliminate up to 50 percent of the redundant cost. Two, a bank that has higher currency (higher multiple) can buy other banks (trading at lower prices) and is accretive to acquiring bank’s earnings. And third, the acquiring bank is looking for a platform; a niche, a market or other strategic reasons.
We like banks with earnings growth momentum, low cost of deposits, outstanding credit, significant insider ownership and large, successful bank investors that inherently put more pressure on the board and management to perform. We also like banks that are in growth markets with an alignment of interest from board, management, employees, customers and shareholders. We like to purchase at very attractive valuations. In private bank investments, we can occasionally recommend board members. We like banks with high returns on equity, assets, good net interest margins and low efficiency ratios. We do not like to invest in low-quality banks, slow growers, or poor or mediocre management. Banks are cyclical, so it’s important to take advantage of market cycles and segments of banks when opportunities arise.
The banking industry is a very stable and important part of our economy. Decades ago, there were 17,000 banks in America. Today there are nearly 5,000 banks and fewer than 700 are publicly traded. Most countries only have a handful of banks. While on average 4 to 5 percent of banks sell each year, last year over 20 percent of our banks sold in one of our funds.
When you have an outstanding team, disciplined investment process, a tremendous amount of experience, a good reputation, high integrity, proven track record, incredible contacts and the ability to find and evaluate many opportunities, it greatly improves your chances of success. ●
Umberto P. Fedeli is CEO of The Fedeli Group
