One advantage that community banks have over their larger competitors is that they seldom have to worry about securities analysts.
Large institutions live in terror of these people with their CFA titles. Let an analyst reduce a rating on a bank, and the stock is likely to take a big hit-and that means a lot for large investors, hedge funds, and officers holding stock options.
Of course, analysts issue far more "buy" than "sell" suggestions, and there are reasons:
A recommendation to dump a stock means the analyst's firm is unlikely to get any future investment banking business from that bank.
A "sell" recommendation angers the clients who hold that stock and makes them look somewhat inept.
An analyst knows that a "buy" recommendation makes friends and a "sell" makes enemies. So why take the risk when you can simply say nothing about a bank whose prospects you feel have declined?
On the other hand, investors worry that positive recommendations may have an ulterior motive-such as the writer's winning investment banking business away from some other firm.
Some even feel there has been a "dumbing down" of analysts.
Wall Street people seem to be less informed today, despite the explosion of data. This is because of pressure to generate business, which entails days on the road selling, rather than spending time in the office scrutinizing data.
Still, analysts do perform a service-especially when they are analyzing a bank's long-term potential.
For example, an analyst friend of mine says that one of his favorite stock picks develops customer information systems for clients with high profit potential, and it caters to them. The cost in terms of today's expenses is high, but he feels the bank's long-term profitability will be strongly enhanced. That's something the financial data do not show.
Community banks are somewhat immune to analysts and their influence on market prices.
First, they get less attention. No one wants to develop a report on a bank whose stock is so illiquid that even if they tell a solid story, they can't find the shares to sell to their clients. And if they don't have the paper to sell, they can't earn anything from their research efforts.
More important, most community banks have investors who are in it for the long haul, so analytical forecasts of next years' earnings mean little to their share owners. Whereas 5% to 10% of the shares outstanding of a money-center bank may turn over in a couple of days in a hectic market, many community banks stocks don't get turnover like that in a year or more.
So how can a community bank raise the price of its stock when reports on them are infrequent or nonexistent? This is important if it needs capital to buy other banks, or if it wants to sell the bank, or simply to make shareholders and officers with options happy.
First, get to know market makers intimately, so they will have a story to tell potential buyers. Also, make the stock as liquid as possible through splits, stock dividends, dividend reinvestment plans, and other means of providing marketable shares, so market makers can get stock if they like it and want to place it.
Beyond that, it is tough for smaller banks to induce their stock price to move up, even if performance justifies such a rise.
Let's make this issue our latest contest.
What does your bank do to help make the market reflect good performance? What works? What doesn't?
Send your suggestions to me at 14 Friar Tuck Circle, Summit, N.J. 07901, or fax them to (908) 273-7309.
The winner will become president for a day of our Schmidlap National Bank. May your suggestions last longer than your term in office.