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Questions bank investors are asking… E-mail

Loan concerns give way to queries on growth, income

 July 8, 2011
http://www.ababj.com/images/stories/42811briefing_hogandave.jpgBy Dave Hogan. A former newspaperman, Hogan is a bank investor relations officer in Texas. He is also a teacher and freelance writer. Earlier this year he wrote “Bull, Bear & Bird: Social Media and Investor Relations,” a look at how banks and other financial companies are using social media for investor communications. 

Investors in bank stocks are feeling better about credit quality. But they continue to have concerns about the impact of new and proposed regulations and continued slowness in the economy.

That’s the conclusion of several investor relations officers from publicly traded banks interviewed during the recent 2011 annual conference of the National Investor Relations Institute in Orlando, Fla. This year’s conference attracted about 1,300 investor relations officers from public companies throughout North America and the world.
Hard to give investors definitive answers
Investor relations officers represent their companies to shareholders and investment analysts. A significant part of their time is spent responding to questions from analysts and institutional investors. Bank IR officers say they are getting plenty of questions these days but that giving specific answers is sometimes difficult given the unsettled state of the industry and the economy.

“The most challenging thing does go back to the regulations and knowing how we’re going to be able to position ourselves going forward,” said Abby Wendel, senior vice- president and director of corporate strategy and investor relations for UMB Financial Corp., a $13 billion-assets holding company based in Kansas City, Mo.

“In the wake of the Dodd-Frank legislation, with more than 2,200 pages of legislation to deal with, the most difficult thing to figure out is how that’s going to affect us and to be able to answer questions from analysts on how that legislation will affect us when we don’t really know yet,” Wendel added.

  More about Dodd-Frank impact
If you found this article helpful, check out this earlier article: “Dodd-Frank casts shadow on shareholder communications.” Expert Andy Mus presented strategies for handling investor questions at ABA’s Community Bank Investors Conference earlier this year.
Wendel was in charge of the Banking Industry Roundtable, one of several industry-specific groups that met during the NIRI conference for the purpose of discussing issues of common interest.

Greg Parker, senior vice-president and director of investor relations for Cullen/Frost Bankers Inc., agreed that new and pending regulation generates many questions from institutional investors. Cullen/Frost is a $17.9 billion-asset financial holding company based in San Antonio.

“I get a lot of questions about Dodd-Frank,” Parker said, noting that he may get more questions about new federal regulations than the average bank IR officer because Dick Evans, the company’s chairman and CEO, is serving a two-year term as a member of the Federal Advisory Council to the Board of Governors of the Federal Reserve System in Washington, D.C.

Cullen/Frost also attracted national attention in late 2008 when it became one of the first banks to publicly announce that it would not accept any funds from the federal government’s Troubled Assets Relief Program, or TARP.

“We consider that (refusing TARP money) one of the best decisions we’ve ever made,” Parker said.
IR looks at interest on business checking
The repeal of Regulation Q, which goes into effect July 21 and eliminates the prohibition against banks paying interest on checking accounts, also generates questions from bank investors. (For more about this, read “Dodd-Frank & Reg Q: To Pay Or Not To Pay?”, a roundup of community banks’ plans.)

“We feel like the Reg Q repeal is going to be a big deal, whereas many other banks are saying no, it’s not going to impact much,” Parker said. “In this kind of interest-rate environment, you are right. But if rates start moving up, you’re going to see someone break the barrier and want to pay for those deposits. Then, a lot of little banks are going to get hurt. The community banks are starting to become more and more aware.”
Looking for growth in a stagnant pool
With a stalled national economy, bank IR officers say investors have questions about how banks will generate growth.

“Right now, on the short-term investment side, everybody is asking ‘Where’s the revenue?’,” said Jay Gould, senior vice-president and director of investor relations for Huntington Bancshares Inc., a $53 billion-asset bank based in Columbus, Ohio.

“I’m getting fewer questions on credit today, that’s sort of yesterday’s news, and everybody is saying ‘How do we get growth?’,” added Gould. “There’s a lot of concern about loan growth, and with the growth of margins a lot of concern about pricing pressure.”

Gould said investors also have questions about fees, particularly in light of the loss of traditional fee revenue from changes to Reg E and the so-called Durbin Amendment, regulating electronic fund transfers.

“What are your business strategies to deal with that?” Gould said investors are asking banks. “Are you just going to suck it up or are you going to change your business model?” 

Longer-term investors, according to Gould, want to know how banks plan to recoup these lost fees and whether banks will pass added costs along to customers or look at expense controls.
Strategic issues raise concerns
Capital deployment and merger and acquisition (M&A) issues are also on the minds of investors.

“Investors are becoming more comfortable with credit quality and where that is relative to the banks they are looking at,” said Michelle Debkowski, executive vice-president of finance and investor relations for National Penn Bancshares Inc., a $9 billion-asset bank based in Boyertown, Pa. “They’ve seen improvements in capital but now it’s ‘What are you going to do to deploy that capital?’ Are you going to be involved in M&A? And if so, people are feeling that everybody is a buyer. Nobody is a seller yet and those that may be looking to sell are still looking for prices that are too inflated.”

Gould said he has heard similar comments regarding banks’ M&A plans.

“The big question (for M&A) is what is going to be the catalyst?  Nobody knows what is going to be the trigger,” said Gould. “Are the sellers’ expectations too high? Everybody is going to remain on the sidelines until we get capital defined. How do you know what capital you’re going to be using to do what you want to do with M&A?  I think we’re in a holding pattern on that issue.” 
Investors ask about bank differentiation
Another issue is how banks can best distinguish themselves with consumers in an increasingly competitive market.

“They (investors) are looking to see how banks will differentiate themselves,” said National Penn’s Debkowski. “The talk about banks being a commodity is coming from the investors. They want to see how you plan to break out from the pack.” 

When the recession hit in 2008 and 2009, many banks drastically cut their dividends paid to shareholders. Gould said this is a concern to both individual and institutional investors.

“We’re not going to be attractive to retail investors until we get a dividend with some kind of a decent yield,” Gould said.

TALK BACK! What questions are you hearing from your bank’s investors?

[This article was posted on July 8, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]  
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