by Will Ashworth | December 13, 2011 9:17 am
Call it a curse. Many of the past winners of American Banker’s annual banker of the year award have soon after befallen some sort of career setback. Ken Thompson, former CEO of Wachovia, won the award in 2005. Less than three years later, his firm was sold to Wells Fargo (NYSE:WFC) in an FDIC-run auction, barely avoiding collapse. This year’s recipient is Robert Wilmers, CEO of M&T Bank (NYSE:MTB). Despite record earnings, I recommend investors steer clear of the banker’s curse and instead buy regional rival First Niagara Financial Group (NASDAQ:FNFG).
M&T Bank is one of Berkshire Hathaway‘s (NYSE:BRK.B, BRK.A) 15 biggest holdings as of the end of November. Warren Buffett owns 5.2 million shares of the Buffalo bank, considered by many to be one of the best operators in financial services. M&T’s annual return since 1980 is 19.3%, the best performance among the top 100 banks in America. With that kind of pedigree, it’s hard to bet against it.
However, with First Niagara’s stock down 33% year-to-date — combined with the fact it actually has outperformed M&T Bank over the past decade — now is a great opportunity to take advantage of the short-term growing pains facing First Niagara. They won’t last forever.
In July, First Niagara announced it was buying 195 branches in New York and Connecticut from HSBC Holdings (NYSE:HBC) for $1 billion. As part of the deal, First Niagara will have to sell approximately 40 branches to meet antitrust regulations. The 155 branches it will keep come with $11 billion in deposits. The merged branch network will number 440 locations, $18 billion in loans, $30 billion in deposits and $38 billion in assets. Depending on how many of the 40 branches divested are in the Buffalo area, First Niagara could end up with more branches in western New York than M&T Bank.
The decision to grow by acquisition has come at a cost to its business. To finance the deal, First Niagara has had to issue additional stock and debt that has reduced its tangible book value by 30%. To build its capital back up, FNFG has cut its quarterly dividend in half to eight cents per share. While the shares were priced at $8.50, the lowest level since 2002, it was an encouraging sign that underwriters exercised their overallotment of 3.97 million shares. By exercising the overallotment, it puts an artificial floor price on its stock while still providing investors with a reasonable yield of 3.8%. Once it has had the opportunity to digest the HSBC branches, Sterne Agee analyst Matthew Kelly believes First Niagara will be a solid growth play and one of the better performing banks.
In the past two years, First Niagara has made four acquisitions totaling $2.8 billion. Before all of this M&A action, First Niagara had just $6.1 billion in deposits. They’ve grown five-fold since July 2008. It’s only natural with this much consolidation that First Niagara will suffer from a little indigestion. Not to worry. By the end of 2014, FNFG’s tangible book value per share should be $8.19, 56% higher than today. Management suggests the 2012 earnings estimate of $1.09 is 6% to 7% too high. Therefore, First Niagara’s stock currently is trading at 8.5 times forward earnings. That’s lower than at any time in the past decade, and because First Niagara has cut the dividend in half, its payout ratio in 2012 will be just 31% and more than manageable.
M&T Bank might have the current banker of the year, but First Niagara is the better opportunity in 2012.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.
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