Thursday, March 30, 2006

Bank of New York - Is IT finally happening?

Bank of New York (BK) may have finally done some restructuring. I eagerly await.

Rumors have been swirling that BK has sold its retail branches to JPMorgan-Chase (JPM.) The valuation that Capital One found appropriate in North Fork Bank just a few weeks ago, may have stirred BK into action.

If BK gets a NFB kind of a valuation on a premium paid for deposits, this would represent about $15 billion. This is a highly optimistic valuation but that was the going price for what I believe to be a less attractive, less established franchise.

There appears to be some discussion that certain branches, probably within Manhattan itself, would be excluded from the deal.

I believe that BK could engage in a fairly significant share buyback with the proceeds of such a sale. BK to date has done a relatively modest effort in share buybacks. In the last five years, only in 2005 was there a buyback of stock in excess of issuance. This amounted to a net buyback of merely $174 million, which compared to a market cap of $28 billion seems like a modest effort.

What will remain? Hopefully, this becomes a much more focused bank involved in security services and global processing. Perhaps, some multiple expansion will ensue as this becomes a wholly fee driven bank resembling Northern Trust (NTRS) or State Street Bank (STT) much higher return and higher multiple stocks.

With the almost 5% rise in the stock, is there much left on the table? In my view, if BK pulls off a NFB kind of a deal, the stock should see $40...combine that with a decent buyback of at least 10% of the stock and I think we could see mid $40's valuations.

I, my family, and my clients have a position in BK and do not currently own a position in COF, NFB, NTRS, or STT.

1 Comments:

At 11:53 AM, Blogger BaronofBanks said...

I believe some of your calculations are significantly inaccurate. If we ascribe a valuation to BK's deposits equivalent to that which COF offered NFB, the deal valuation would be closer to $5.36 billion. I will share the calculaions here and please show me your rationale. On page 5 of the COF/NFB merger presentation, the companies say they paid a 34.1% premium to core deposits. My back of the envelope calculation comes to 34.7% so I won't quibble with their number. My calc on NFB was $14.6billion (deal size) - $9 billion (NFB GAAP equity as of 12/31/05) + $5.2 billion (NFB goodwill as of 12/31/05) = $11.52 billion which is the deal size - what COF paid for NFB's tangible equity. Take this number and divide by $33.2b (on page 23 of COF/NFB merger presentation this is the retail deposit figure they use) and I get 34.7%. Now let's look at Bank of New York. This is said to be just a transaction for the branches wo we assume no equity. Then we go to the BK 10-K in which on page 22 average deposits in the retail and middle market bank is $15.709 billion. Multiply this by 34.1% and we get $5.36 billion. Now I would argue since BK has had almost no growth in deposits or in earnings for years in this segment, it should get a lower multiple than NFB. Also I'm not sure you looked at potential tax consequences. Even if JPM and BK do an asset swap there could be tax paid (as we saw in the recent LM transaction). Still, I think BK is likely to move higher on a deal (I own BK as well).

 

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