2023-06-22 23:20:54 ET
Summary
- VersaBank's strong performance, strategic diversification, and solid business model make it an attractive stock for investors.
- The bank's planned U.S. expansion and potential acquisition of Stearns Bank Holdingford offer significant growth opportunities.
- Investors should be cautious of regulatory challenges, market volatility, and changes in the digital banking landscape that may impact VersaBank's performance.
Thesis
VersaBank's (VBNK) impressive performance, featuring robust growth, operational efficiency and sound asset management, future U.S. expansion prospects, and undervalued metrics suggests upside potential; however investors should be wary of regulatory challenges, market volatility and digital banking landscape changes which might impact this bank. Nevertheless, its strong fundamentals, strategic diversification and solid business model make an excellent argument for buying its stock.
Company Overview
VersaBank is a unique institution in the financial industry with its roots in Canada but also extending its reach into the United States. Established in 1979 and originally known as Pacific & Western Bank of Canada, the bank opted for a branding revamp, adopting the name VersaBank in May 2016. They continue to operate from their headquarters in London, Canada, and have steadily evolved their business model to adapt to changing financial climates.
One cornerstone of VersaBank's business is their broad selection of deposit products. These range from the stalwart guaranteed investment certificates (GICs) and registered retirement savings plans (RRSPs) to more flexible offerings like daily interest savings accounts and tax-free savings accounts. This wide array of products provides them with a robust source of capital while offering customers financial solutions tailored to their specific needs.
VersaBank has also established a name for itself in the lending sector. They cater to a diverse clientele, providing services such as point of sale financing. Here, they purchase loan and lease receivables from various industry finance companies, effectively transforming these receivables into liquid assets.
The bank's commercial banking services should not be overlooked either, offering a myriad of options including commercial real estate, public sector/infrastructure financing, condominium financing, and residential mortgages. Moreover, VersaBank has ventured into the emerging field of cybersecurity services. This move represents a strategic diversification, allowing the bank to stay relevant in an increasingly digital world and potentially tapping into a lucrative market.
Expectations
Currently, VersaBank is followed by 3 Wall Street analysts with an average "buy" rating on the stock that projects a modest 14% upside price return potential.
Performance
Looking at their YTD performance , VersaBank investors should be ecstatic, given the conspicuous abundance of negative results compared to its counterparts.
Valuation
The overall valuation grade for VBNK is sitting at a less-than-impressive D (see table below), which at first glance is concerning. However, when you delve deeper into the numbers, you start to see a more nuanced picture of VBNK's position. From a P/E Non-GAAP ((TTM)) standpoint, VBNK is trading at a slight premium compared to the sector median. This might suggest investors are willing to pay a bit more per dollar of earnings, possibly due to expectations of future growth.
However, the fact that it's slightly down compared to its 5-year average indicates that the market could be taking a more cautious stance on VBNK's earnings power compared to past years. The forward-looking P/E metrics are more positive, though. Both Non-GAAP and GAAP ((FWD)) figures are considerably below the sector median, suggesting VBNK is undervalued from a forward earnings perspective. These numbers tell me that if VBNK can deliver on its projected earnings, there could be considerable upside in the stock.
When we examine the Price/Sales ratio ((TTM)), it appears that VBNK is trading at a significant premium compared to the sector. This suggests the market is expecting strong revenue growth from the bank. However, the fact that this metric is lower than its 5-year average might suggest a bit of investor skepticism creeping in regarding future sales growth.
It's worth noting the Price/Book ratios too. Both current and forward-looking ratios are lower than the sector median, which implies that VBNK’s assets are somewhat undervalued. This could be a potential value play, especially if the bank can successfully leverage its assets to generate returns.
Where I see a true standout, however, is the Price/Cash Flow ((TTM)) ratio. VBNK is significantly below the sector median, which indicates that the company is generating strong cash flows relative to its share price. This is a strong point in VBNK's favor and suggests robust operational efficiency.
Yet, the story isn't all rosy. The Dividend Yield ((TTM)) is a sore spot, as VBNK significantly trails the sector. It seems investors looking for income may want to look elsewhere, but those looking for growth might be willing to overlook this.
And finally, when we look at VBNK's capital structure, the bank appears to be in a decent position with a market cap of $204.36M, total debt of $80.21M, and a healthy cash position of $165.18M, the bank seems to have a manageable debt load and ample liquidity.
Q2 2023 Bullish Earnings Takeaways
The bank's loan portfolio , a critical driver of its profit engine, demonstrated a robust growth trajectory, culminating in an unprecedented $3.4 billion. This not only showcases the strength of its operations but also the competitive edge its business-to-business digital banking model confers in today's increasingly digitalized economy. The impressive performance of the loan portfolio has inevitably played a significant role in the overall growth of the bank's balance sheet, which bolstered by a 39% YoY and a 6% sequential increase, stands as a testament to VersaBank's sound asset management strategies.
Moreover, VersaBank has been astoundingly effective in converting operational efficiency into profitability. An impressive efficiency ratio of 43% lays bare the benefits of VersaBank's branch-less model, reflecting its capacity to maintain a lean cost structure while delivering high-quality banking services. This operational excellence, coupled with controlled costs, has provided fertile ground for profitability, which saw a meteoric rise in the period under review. Specifically, net income swelled by a commendable 108% YoY while EPS experienced a striking 124% YoY surge, underscoring the bank's ability to enhance earnings performance and shareholder value.
It's also worth noting the remarkable improvement in the bank's return on common equity, which surged by an eye-catching 104% YoY. This key performance indicator serves as a beacon of VersaBank's adeptness in delivering value to shareholders. The increased returns suggest the bank's strategies are not only increasing earnings but also efficiently utilizing shareholders' equity.
Now, let's shift our focus to the future growth prospects embodied in VersaBank's U.S. expansion strategy. The planned acquisition of Minnesota-based Stearns Bank Holdingford holds transformative potential. Should the acquisition receive regulatory approval, VersaBank could find itself with a significant foothold in a vast U.S. market. This strategic move could mirror the bank's Canadian growth narrative, opening up a lucrative avenue for expansion. The bank's limited launch of the RPP program in the U.S already demonstrates promising growth, with a 35% growth in the portfolio. This lends credence to the broader prospects of a national launch, indicating a robust potential for future growth and expansion.
Risks & Headwinds
Firstly, regulatory uncertainty surrounding the acquisition of Stearns Bank Holdingford presents a significant challenge for VersaBank's expansion plans. The rigorous and protracted due diligence process conducted by various U.S. regulatory agencies introduces uncertainty, raising the possibility of potential setbacks that could hinder the bank's strategic growth initiatives.
Secondly, a decline in the CET-1 and leverage ratios from the previous year's Q2 figures indicates a potential reduction in VersaBank's ability to withstand financial distress. Moreover, the increase in non-interest expenses during Q2 compared to the previous year is a noteworthy trend. Higher salary and benefits costs, as well as elevated professional fees associated with the U.S. bank acquisition, contribute to this upward trajectory. If this trend persists, it could exert pressure on the bank's profitability, necessitating diligent expense management measures and a focus on operational efficiencies to maintain financial health.
The rising cost of funds during Q2 is an additional concern. This increase is primarily driven by a larger proportion of wealth management deposits relative to lower-cost insolvency professional deposits and the general rise in interest rates. Continual increases in the cost of funds have the potential to erode VersaBank's net interest margin and overall profitability. Furthermore, VersaBank's loan portfolio growth is heavily reliant on the point-of-sale financing business. Any slowdown in this sector could substantially affect the bank's growth rate and overall performance.
Lastly, it's crucial to address VersaBank's exposure to commercial real estate. Although the bank exercises caution in this regard, commercial real estate is known for its volatility , which is highly influenced by economic conditions. In the event of an economic downturn, there is a heightened risk of higher default rates within the commercial real estate sector, potentially impacting VersaBank's performance.
Final Takeaway
VersaBank's strong performance, driven by its robust loan portfolio, operational efficiency, and sound asset management, positions it for future growth. The planned U.S. expansion and potential acquisition offer transformative potential, while the undervalued stock and positive forward earnings outlook suggest considerable upside. However, regulatory uncertainty, market volatility, reliance on digital banking, and exposure to commercial real estate pose risks that need to be carefully monitored. Yet, overall, considering the growth prospects and current valuation, I believe a "buy" rating on the stock is justified.
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VersaBank: Strong Fundamentals And Operational Efficiency Signal A Promising Opportunity