MINNEAPOLIS -- Bank stocks have been in the dumps recently, but Ben Crabtree couldn't be happier.
The Midwest banking analyst at Dain Bosworth Inc. says that the current downturn provides a rare buying opportunity for investors, who he says sometimes forget that banks are not growth stocks.
"It looks wonderful to me right now," said Mr. Crabtree, who was recently named an American Banker All-Star analyst. "If you aren't already overweighted in bank stocks, now is the time to get there."
Not surprisingly, some of his favorite stocks include high-performing hometown banks Norwest Corp., First Bank System, and TCF Financial Corp., a thrift, and Milwaukee-based Firstar Bancorp.
Indeed, he says the recent dive of the sector -- triggered by emerging portfolio problems at some big banks -- could turn into a divide between average and high performers in January when yearend results are reported.
Mr. Crabtree, a bank analyst for the last nine years, says the gap between the best banks and others can only grow into 1996, as credit-quality concerns further affect stock price-to-earnings multiples.
But don't look for the genial analyst with a taste for jazz guitars to put his own money into his stock picks. "I got to the point a couple of years ago where I might want to sell a stock for some reason, but I was recommending it to investors," he recalled. "It felt very uncomfortable."
Despite his personal policy, Mr. Crabtree had no shortage of investment ideas during a recent interview in his downtown Minneapolis office.
Q.: What is upside of today's down market for bank stocks?
CRABTREE: I think that one of the things that brokers and investors forgot in the 1990-93 period is that this is a slow-growth business. These are not growth stocks, and it is important what you pay for these things.
You can buy a growth stock and pay too much, because the rapid earnings growth in going to bail you out. If you pay too much for a bank stock, its going to take you a year and a half or more to get to where you are making money, because it is a slowgrowth business.
You have to be price-sensitive in your buys and sells. I have tended to do that.
Q.: Is that why right now looks so good?
CRABTREE: It looks wonderful to me right now. To be honest, one of the least comfortable times I've had in the last couple of years was in late 1993. Everything was working, and banks were way too popular. The wrong investors owned them -- momentum players owned it, people who didn't understand banking.
I fault myself for not recognizing how much risk there was in that. I never would have believed the stocks could have gotten this low.
With a group like this, you have to buy them when they are cheap. If you aren't already overweighted in bank stocks, now is the time to get there.
Q.: You are a fundamentalist. What do you look for in a bank stock?
CRABTREE: The way I view banks, I guess, is a little differently than what I perceive as the market's view of banks.
Banks in this part of the world are companies that retail fairly mundane financial products to customers who are not terribly sophisticated and don't need a lot of advanced products. If you look at most customers of banks here, they view themselves as having relatively few alternatives.
I tend to think of banks in traditional consumer terms: market share, cost of delivery, marketing skills.
Q.: Is that how the market views them?
CRABTREE: It's my belief that the world views the banking industry as a bad business and a shrinking business. In my universe, I would say that I disagree with both conclusions.
One of the really important things that is going on, market by market, is that oligopolies are forming, and you are forming networks of oligopolies, so that you have geographic protection.
I'm really simplistic. I say, gee, you've got smart guys running oligopolies in a basically O.K. business. Aren't they going to generate 15% returns on equity? My answer is yes.
Q.: What is your outlook?
CRABTREE: I think that what is going on in the bank stock market right now is a recognition that, like loan quality, asset liability management is impossible to judge from the outside on a realtime basis. And the surprises that we have seen from PNC [Bank Corp.] and Banc One Corp. have made investors realize that.
If that's true, it seems to me that banks which come through with good earnings and good margins in the fourth quarter and don't have to take the big writeoffs that destroy earnings, then the market is going to say that those banks belong in the upper tier.
Q.: When do you see the best and the average being separated in the market?
CRABTREE: I see that in January. Of course, I could be wrong here, but it seems the market will say that the ones who surprised me will have to rebuild my confidence and the ones that delivered I'm going to start being less skeptical about.
Q.: How much difference in stock prices do you see?
CRABTREE: I think a multiple point or two is what we may be looking at. Which is a lot, when you are talking about low multiples.
When credit quality gets to be a bigger issue, I think you could see even more of a spread. That is a bit of a tar baby in most people's minds, and it probably is in reality. That is, it's not a problem that is solved quickly, and it tends to always be worse than you thought it was. I see that in 1996.
Q.: Who are your favorites for 1995?
CRABTREE: TCF Financial, First Bank System, Norwest Corp., and Firstar. Those are kind of my day-in, day-out buys.
Q.: Who do you like each of them?
CRABTREE: TCF is a bank in thrift clothing that has a very strong share of its markets, strong internal earnings improvements coming from mix changes in deposits and loan portfolio, and the opportunity to make more acquisitions in its markets. And, I believe TCF has an opportunity to get a near-bank P/E [multiple].
I'm operating under the assumption that unlike now, banks will go back to trading at about 11 times trailing earnings. And in that environment, I put a 10 P/E on TCF. In my mind its a $50 stock in 12 months.
Q.: What's the greatest risk to that franchise?
CRABTREE: That's it. I don't see anyone going after their market. I don't see Charles Schwab or American Express doing it. I don't even see First Banks going after their customers. Some finance companies will go after their customers, but they can't raise money under the Treasury curve. TCF can.
Q.: Who would be second of the four?
CRABTREE: Firstar is perhaps the cheapest bank of all of them. The story here is really pretty straighforward. It is a high-performing bank with a healthy market share. It is enhancing its market share with acquisitions. It has a nice, broad mix of fee income, and good asset quality. And as I said earlier, every time you see a survey among the best-performing banks in their category, there is Firstar in the No. 1 or 2 position.
If Firstar doesn't beat the market hands down, I will be astonished.
Q.: Who's next?
CRABTREE: I like First Bank. It is a newer story to some investors, and it is performing well at the bank level. And you can't disregard the possibility that it will be acquired in the next few years.
Here is a bank that has in some ways very attractive franchise value. You cannot get into Minnesota or Colorado without making an acquisition like First Bank. Then, when it gets done with its acquisition of Metropolitan Financial, it will be in a number of other attractive states.
Q.: You've had an interesting history picking this stock.
CRABTREE: In my universe, I could say First Bank has been my most frustrating stock. But at least I can say I have roundtripped it.
The chronology of this goes back to say 1988. I had been recommending the stock at $26. I got wind that there was going to be a major restructuring. I took the "buy" off.
There was a lot of uncertainty, and the stock sold off to $18, and I said, this has got to be the bottom. So I put my "buy" back on and pounded the table all the way down to $9. Then I pounded the table all the way back to $18 and some change.
Then I said the classic investor's prayer -- you know: Lord, get me out even and I'll never do it again.
I took the "buy" back off for a while. I have done all right since.
Q.: What about Norwest?
CRABTREE: At the moment, Norwest is incredibly cheap. It has a wonderful geographic mix, probably one of the best in the industry. It has a strong mix of banking and nonbanking income. There is a disciplined acquisition strategy.
I think it has every prospect of giving us earnings growth somewhere in the mid-teens over the next few years and a return on equity of 20%. My basic operating assumption is that the fundamentals ultimately come through, and somewhere in there this stock is going to have to trade at a premium to other banks.
I think if there is any one thing that drives Norwest management it is consistency, the drive to deliver the numbers with no surprises. Obviously the market does not agree with me on this, but I keep telling investors they have no stock in their portfolio with less potential for surprises than Norwest.
Q.: Is there anybody you like on takeover speculation?
CRABTREE: I tend to not like companies just for their buyout potential.
First Financial in Stevens Point, Wis., from time to time receives buyout offers. It's about a $5 billion [-asset] thrift, and it has a traditional thrift business, but it is very much an ARM lender. It has a good credit card operation. It has a reasonable amount of consumer lending for a thrift, and it has a slightly higher fee income than most thrifts -- about 25% of revenues.
The bank has a good earnings mix, good profitability, good margins. Longer-term it is a very logical acquisition candidate for somebody like Norwest or First Bank. I don't think it's going to come anytime soon.
Q.: Any other favorites?
CRABTREE: I like Roosevelt Financial. It's an unusual company, and I've never found anybody quite like Stan Bradshaw. I think he's the most interesting CEO in the business that I've run into.
I cannot believe its a buyout candidate, and that's based entirely on my interpretation of Stan Bradshaw and his drive.
I put myself in his shoes: I have a strategy that generates a 20% return on equity and grows by 15% a year; why would I want to sell out to somebody else?
If Stan reaches a point where he can't grow his book value at that level, he will look to sell. I don't see him as being anywhere near that now.
Q.: What do you like about the company?
CRABTREE: One of the things I found so intriguing about him is that he doesn't lie to himself about creating shareholder value. He understands you don't create shareholder value by taking interest rate risk; and you don't create value by originating conforming product, because anybody can do that.
Stan says you create shareholder value with three things: run with very low costs, which he does; run with the minimum acceptable equity-to-asset ratio, which he does; and raise deposits well.
That latter point is somewhat undecided; deposits went down in the third quarter. It's probably what you would expect post-merger. But he is not going to hit my estimates and not going to maintain the machine unless he can start regenerating deposit growth out of his own system. That's the only question mark.