Why Signature Bank Can’t Be Beat

Why Signature Bank Can’t Be Beat

by Alyssa Oursler

The financial sector has been slightly outperforming the market over the last 12 months and has been regaining strength dramatically since the financial crisis hit in 2008. Many of the biggest banks have bounced back from near death, posting improvements in earnings and asset quality recently. But some small banks have been regaining strength as well — and one small bank in particular barely took a beating even during the crisis, which sheds light on just how strong it is. Signature Bank (SBNY) is on the Crossing Wall Street buy list and has been blowing away rivals since going public in 2004.

For background, Signature is a full-service commercial bank with 27 private client offices located throughout the New York metropolitan area. That might not sound that impressive, but that niche has bred success for Signature, The key that sets the bank apart is the fact that it’s built on people, not on buzz.

As a Crain’s New York feature showcased, “Signature has secured a reputation in its field as a place where seasoned bankers want to work … Signature’s success stems from management recruiting groups of experienced business bankers, from rivals like Citibank and HSBC, who bring clients with them.” In fact, Signature’s CEO told Aaron Elstein at Crain’s: “It’s true we aren’t in the headlines much. I don’t mind.” He prefers to focus on hiring the best people as opposed to grabbing media attention.

That might sound fluffy as an investment thesis, but it trickles down to the tangible. See, the bank also offers these top-notch employees a large amount of freedom in how they work with clients, which has been a recipe for success. Of its $14 billion in loans, only 0.25% are more than 90 days delinquent. That’s 10% of the industry average. Signature also spends a mere 36 cents to generate each dollar in revenue — overhead that is 40% below the industry average. For the cherry on top, it boasts a 14% return on equity, which is 4 percentage points above the industry average.

Put another way, SNL Financial recently ran some numbers on the 100 largest banks in the U.S., looking at asset quality, capital adequacy and profitability to gauge the best and worst banks. And you guessed it — SBNY was top of the charts thanks to strong fundamentals on top of impressive growth potential for the NYC market. As Kurt Badenhausen noted for Forbes, “There are $1.4 trillion in deposits in New York banks, almost three times the next biggest metro of Philadelphia.”

Those qualities also make Signature Banks a textbook example of the Crossing Wall Street investing philosophy of buying and holding shares of outstanding companies. During the past decade, Signature Bank has posted 15 consecutive quarters of record diluted earnings per share, while shares of SBNY are up 17% year-to-date and 284% over the last five years. Since going public, Signature is the top-performing bank stock. Their return has more than lapped the second-best performing bank.

Of course, with such head-turning outperformance, it’s fair to be concerned about buying at a top. While the question remains whether Signature Bank can maintain this sizzling upwards trend, the analyst community is bullish, to say the least. Zack’s Investment Research just upgraded SBNY assigning it a $166 price target — good for 12% upside. Earlier this month, Guggenheim raised its price target from $155 to $165 and gave Signature a buy rating.

Plus, estimates for the current quarter and full year’s earnings have been moving in the right direction. Three months ago, analysts were expecting $1.65 per share for the current quarter, while they’ve tacked four pennies onto that number recently — good for double-digit year-over-year growth. Things are even sweeter for the full year; analysts have upped estimates from $6.80 to $6.95 per share, good for year-over-year growth of nearly 17%.

That growth is the reason why, despite the consistent upwards trend, Signature Bank shares aren’t extremely overpriced. The bank is slated for consistent earnings improvements, too, including 13% annual earning growth over the next five years. That’s better than the industry and nearly twice the expected growth for the broader market … which is especially impressive considering the growth it’s building upon.

Meanwhile, the stock just hit a new lifetime high yet is still trading for just 18 times forward earnings. While that’s a slight premium to the 13% growth on tap, it’s worth it considering the track record. Investors are shelling out a slight premium for a company that’s fundamentally sound and has proven itself as a long-term hold … but that also has impressive momentum. Put another way, SBNY is appealing to a wide variety of investors, which should provide further fuel to keep the stock moving higher.

All in all, Signature Bank is a signature buy. Between rock-solid fundamentals, a mouthwatering track record and a strong outlook, there’s no reason to think SBNY won’t continue to blow away both the financial sector and the broader market in years to come.

Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Business Insider, MSN Money, InvestorPlace and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.

Posted by on June 30th, 2015 at 11:20 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.