Leaders of publicly traded banks need to share their stories with investors — and they need help from analysts to do it.
Having a solid relationship with buy- and sell-side analysts can lend credibility to a management team, especially when times are tough.
CEOs who want to successfully navigate this relationship must be consistent, transparent and accessible. At the same time, leaders must exercise some level of restraint if an analyst questions his or her plans, industry experts said.
“A lot of institutional investors, while they don’t live and die by the analysts, clearly read everything that analysts” put out, said George Morvis, president and CEO at Financial Shares Corp., a consulting firm that handles investor and public relations. “If you’re pretty candid to the extent that you can be, it can help your credibility, which is the key to the analyst community. Nobody wants to be surprised.”
There are more than 400 publicly traded banks with market capitalizations above $100 million, so investors have plenty of options, said Tony Rossi, a senior vice president at Financial Profiles, a financial communications agency that deals in investor relations. Banks that work effectively with analysts can reach a broader audience, which can be important as an institution grows and has access to new investors, he added.
“There’s always opportunities to expand the investor base until you reach the large-cap level,” Rossi said. “Now you are in the appropriate size category and you need to understand who those new opportunities are and make sure you are getting on their radar screen.”
While most relationships between bankers and analysts are professional, and much of the evaluation process is mathematical, there are times where emotion and personal preference creep in, industry observers said.
Analysts, for instance, often spend considerable time with a bank’s management team during roadshows and other activities. That allows them to get to know executives on a deeper level, helping an analyst to provide more detail in areas tied to a CEO’s consistency or reliability, Rossi said. Bank CEOs who decline these opportunities miss out.
“There’s absolutely emotion involved because we’re human beings,” said Chris Marinac, who leads FIG Partners’ equity research team. “When you have a company that performs well, there’s a sort of respect and a bond that is formed because confidence is created with analysts as a result. You can flip that to the negative. When companies miss earnings or don’t execute, then it becomes a challenging situation.”
Marinac said he believes that an “open dialogue and respect on both sides” happens most of the time, though problems arise when management completes a series of moves “that goes against what they said they would do.”
If something negative is written about the company, the CEO’s first instinct is often to cut off access to an analyst. That is the wrong move, experts said, noting that consistency and fairness are keys to having a good investor relations program.
Ted Kovaleff, a former analysts and current bank investor, recalled when Fremont General refused to return his calls after he questioned the sustainability of the subprime mortgage lender’s earnings growth. As a result, he downgraded the company and eventually stopped covering it.
Fremont filed for Chapter 11 bankruptcy protection in 2008.
“There are thousands of banks out there, so you have to set yourself apart,” Kovaleff said. “The best way to do that is by hopefully telling a good story.”
First Horizon National in Memphis, Tenn., struggled after the financial crisis with problems tied to its mortgage dealings. At that time, management remained transparent about the problems and what was being done to fix them, earning the company an excellent reputation, Marinac said. (The company has won various awards from Institutional Investor magazine for its investor relations program.)
First Horizon took a candid approach because the “fear of the unknown with investors is the worst thing,” said Aarti Bowman, the company’s senior vice president of investor relations. Management tried to be open about possible losses and often it was “not as bad as [people] thought it was,” she added.
Overall, the company takes a transparent approach to investor relations and tries to anticipate potential areas of concern, such as energy lending or commercial real estate, and then have information ready about those topics, Bowman said.
“It’s just better to get everything out there then you don’t have to back track,” Bowman said.
Some banks have taken the step of hiring former analysts as executives.
Jefferson Harralson, a former analyst at Keefe, Bruyette & Woods, is the chief financial officer at United Community Banks in Blairsville, Ga. James Abbott and Bob Ramsey, former analysts at FBR Capital Markets, now handle investor relations departments. Abbott joined Zions Bancorp., while Ramsey is now at Customers Bancorp.
On the other side, analysts try to ask tough questions, but in a professional and respectful manner to maintain access to CEOs, industry experts said. They may save some potentially embarrassing questions for the private chat rather than a public conference call, said Scott Siefers, an analyst at Sandler O’Neill.
The activist investor Blue Lion Capital recently issued a press release in an effort to get analysts to ask certain questions during HomeStreet’s fourth-quarter earnings call. Blue Lion, which owns more than 5% of HomeStreet’s stock, has been disappointed with the Seattle company’s performance.
Analysts avoided those specific questions, which could be viewed as overly aggressive, though they didn’t shy away from asking about cost cutting, potential commercial real estate loan growth and other areas.
It’s unlikely that an analyst would take up the line of questioning suggested by an activist investor trying to undermine the credibility of management, Rossi said.
“Analysts don’t have credibility if you ask softball questions,” Siefers said. “By the same token, you don’t have to ask questions that are of a personal nature or too aggressive. There are lines on both sides.”
Making face time also helps.
Old National Bancorp in Evansville, Ind., conducted nearly 100 one-on-one meetings last year with investors at different conferences and roadshows, said Lynell Walton, the $17.5 billion-asset company’s director of investor relations. Old National, as a large community bank, is more visible than many others, but management still values a chance to get in front of analysts and investors, said Chairman and CEO Bob Jones.
Jones said he takes a “kill them with kindness” approach to negative coverage by thanking analysts for their insights even when they downgrade his company’s stock. Jones said he sees the questions that analysts ask as a valuable resource since it can force management to think more deeply about an issue or strategy.
“We don’t always agree, but it forces you to think,” Jones said. “An analyst could see anywhere between 15 to 30 different companies. You’re in trouble any time a CEO thinks they’re the smartest person in the world.”