Will Signet Banking Corp. spin off its fast-growing creditcard operation?
The Richmond, Va., bank isn't tipping its hand, but Thomas J. Brown, an analyst at Donaldson, Lufkin & Jenrette Securities Co., thinks such a move is increasingly likely.
And that is a key reason why Donaldson, Lufkin added Signet's shares to its "recommended" list Tuesday.
To make room for Signet, Fleet Financial Group was pulled off the list.
Although Fleet retained its "very attractive" rating, Mr. Brown said Signet has more potential to rise significantly. 12-month price target: $40.
In late trading Tuesday, Signet's shares were up $1.625, to $30. Signet's shares have risen 25% this year, making it one of the better performing bank stocks. Fleet's shares, which have gained less than 1% this year, were off 62.5 cents, to 33.375.
In a spinoff, Signet might create a separately chartered creditcard company, in which current shareholders would have a stake. The equity as well as senior management would be divided between the traditional bank and the credit-card bank. The two companies, taken together, could have more value for shareholders than Signet does now.
"I think there is better than a 50-50 chance that management will decide to break the company into two parts: a credit-card bank and a traditional bank," said Mr. Brown.
Signet officials could not be reached for comment.
High Level of Capital
The catalyst, Mr. Brown said, may be the bank's high level of capital. Signet's common equity is a strong 7.9% of assets and is growing at 13% a year from retained earnings. There is little asset growth, because lending hasn't picked up yet and the bank is securitizing its creditcard receivables.
Too much equity could depress the bank's returns, hurting share price and leaving it vulnerable to a takeover. Signet executives have told analysts that they are studying the bank's capital and organizational structures.
A spinoff could be beneficial. Since the traditional bank isn't growing earnings quickly, it wouldn't have to worry about accumulating equity. And a separate credit-card bank might use the extra capital to buy card portfolios.
Contribution to Earnings
Signet's card business is booming, accounting for more than half of bank's earnings last quarter. In the past three quarters, card receivables have doubled to $3.4 billion. The bank now has a sophisticated computer system designed to root out the best potential customers. Analysts say the system is among the best in the industry.
But the credit-card business is not being highly valued by investors. Shares of credit-card banks such as MBNA and Advanta trade at price-earnings multiples of 14 to 16. Signet's shares trades at 8.5 times Mr. Brown's estimate of 1994 per-share earnings, making it a cheap stock.
The MNC Precedent
"The marketplace is confused", said, Mr. Brown. "It seems to me that by mixing the rapidly growing credit-card company and the traditional bank, it results in a lower valuation for Signet."
There is a precedent for a credit-card spinoff, of course. MNC Financial Inc. spun off MBNA Corp., a credit-card company.
If the split does occur, Mr. Brown does not expect the traditional bank to stay independent. Signet could be a target for a takeover offer.
Even if the bank doesn't split off the credit-card business, it may still find itself on the receiving end of an acquisition offer. The shares trade at a much lower multiple than big southeastern banks such as First Union Corp.