NTB - The Bank Of N.T. Butterfield & Son Limited - Operationally A Very Solid Business

2023-09-24 04:07:23 ET

Summary

• The Bank of N.T. Butterfield & Son Limited offers a high yield of over 6% and has a track record of growth, making it appealing to investors.
• NTB specializes in serving high and ultra-high-net-worth individuals, offering a range of financial services, and has a solid financial health.
• The company's CEO emphasizes the potential for shareholder returns and the completion of an acquisition that expands its footprint in Asia. The company is undervalued and offers good potential returns.

Introduction

If you are seeking a high-yielding company right now that is also expanding the bottom line at a very decent rate then The Bank Of N.T. Butterfield & Son Limited ( NTB ) looks quite appealing. The yield is over 6% and I think the payout ratio and track record of growth are playing into the hands of investors very well. NTB gains from rising interest rates as they earn more NII. With a discounted p/e against the sector, NTB exhibits lower downside risk currently in my opinion.

I like the company's current valuation and the market that it serves should continue to grow. Besides this, the financial health of NTB is solid and unlikely to cause any significant risks in the medium term. As a result of my bullish sentiment on the business, I will be giving them a buy rating right now.

Company Structure

NTB specializes in catering to high and ultra-high-net-worth individuals, offering a range of financial services including residential mortgage lending, automobile financing, consumer financing, and credit cards. This bank holds the promise of investing in a well-established institution with a strong historical brand presence, all at an attractive valuation.

In addition to its services for affluent clients, the bank's diverse offerings make it an intriguing prospect for investors looking to capitalize on its well-recognized legacy and explore its potential for growth and value appreciation. However, like any investment, it's important to carefully evaluate the associated risks and market conditions before making a decision.

The company has had a last couple of really solid quarters and this has lent them the ability to raise the dividend too. The ROE for example is close to some of the highest levels in the company's history, and currently beating out the sector at 26.3%. Serving a niche set of customers and clients I think NTB can charge a little bit more for their services without risking losing clients. They offer a diverse set of products that are in high demand within those circles.

The rise in interest rates over the last few quarters has had a very positive effect on NTB as we can see above here. In Q1 2023 the NII landed at $97.4 million, which saw a slight decline to Q2 mainly due to lower balance sheet activity and higher deposit costs as well. I think these are short-term issues and will resolve and ultimately yield NTB a strong FY2023 set of results.

Earnings Transcript

Looking at the last earnings call that NTB held I think the CEO Michael Collins had some very valuable points to make regarding the current market situation and how the company aims to position itself to tackle any coming challenges.

• “Our TCE to TA ratio of 6.5% has improved the conservative end of our targeted range of between 6% and 6.5%. As a result, we have been able to continue with the execution of our balanced capital return strategy accelerating our share buyback program in the second quarter with a repurchase of 723,000 shares in the quarter. We expect to continue repurchasing shares throughout 2023 subject to market conditions”.

One of the key features of NTB I think is the strong possibility of shareholder returns over the long term. As long as NTB can maintain a conservative ratio of TCE to TA then the buyback program will continue and even improve as well. To give some reference to this, since 2018 the shares outstanding have decreased by about 10%, or 2% annually. That together with the dividend and over 6% is yielding investors a very good return right now.

• “I am also pleased that we completed the second closing of our planned acquisition of trust assets from Credit Suisse. To-date, 374 relationships representing $21.1 billion of assets under administration have now transferred to Butterfield, significantly expanding our footprint in Asia”.

For some, these advancements may be a risk factor, but I think that NTB has proven itself very capable of properly growing without any unnecessary risk-taking over the years. The additional market exposure I think will only do the company good.

Valuation & Comparison

The dividends for NTB have largely remained the same over the last several years. A yield of around 6% is what the company has right now, but with additional capital being spent on buying back shares I think NTB offers some good potential returns.

Looking at the p/e of NTB it exhibits a decent discount right now. In comparison to historical levels for NTB it offers a 37% discount and a 35% discount to the sector. I think the market is mispricing the company right now. The higher interest rates are not affecting the customer pool of NTB as much as one might think. High-net-worth individuals are often very much able to hedge against that. The slightly lower volumes on the balance sheet may be a reason for the discount, but in the long term, this seems like a small issue and isn't indicative of the actual shareholder potential for NTB. In my opinion, the downside risks are baked in and the upside is high enough to make NTB a buy.

Risk Associated

In the event of a rise in interest rates, there is a potential for an uptick in loan delinquencies and defaults, which could elevate the risk associated with NTB. Such an increase in risk could exert downward pressure on the company's share price. Investors need to monitor this scenario closely as interest rate movements can significantly impact the financial landscape for banks like NTB.

The company could face challenges related to regulatory scrutiny, particularly due to its operations being based in offshore jurisdictions like the Cayman Islands and the Bahamas. This geographical setup might raise concerns and potentially hinder the company's expansion efforts in certain regions of the United States, as the origins of its operations may lack transparency or appear unconventional in the eyes of regulators and investors. It's crucial to consider how regulatory factors could impact the company's growth and market presence in the future.

Investor Takeaway

For those that are seeking a stable and high-yielding dividend income company then I think NTB right now offers a decent amount of value. It may not have increased the dividend that much last few years, but the possibility of it in the future is certainly there when the business is generating an ROE of over 25%. Discounted share price makes the downside risk and, in my opinion, is resulting in a favorable buy situation currently.

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