Complete Bank Data

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During his recent interview with Tobias, Nate Tobik, founder of CompleteBankData and author of The Bank Investor’s Handbook discussed Complete Bank Data. Here’s an excerpt from the interview:

Tobias: What was the inspiration for the Bank Data?

Nate: It was a problem I was looking to solve. Coming out of the crisis, I was looking at bank stocks to buy because they were so cheap, and I couldn’t believe that some of these small banks were so cheap and they were profitable. And I just wanted a screener. I wanted a screener with bank-specific stats, and I couldn’t pay for SNL. So, I looked, and they had the FDIC Call Report data. I thought I had done programming, I was working in tech, had a good buddy who’d done programming. He said, “Look, maybe we could pull this in and write our own screener, and then screen for these stocks.” That’s how it started.

So, it was one of those, like, I thought this would be, everyone would want to do this. I don’t think screeners really make any money. But that evolved into let’s build tools for investors. That evolved to let’s build in-depth market analysis for banks and lead generation for banks. And then now, with this deposit thing, it’s like, now let’s build deposit analytics and find similar customers. So, it keeps changing. It went from the screener that I was thinking we would sell for some $50 or $100 a month subscription, to now it’s a full-fledged enterprise product. There’s consulting hours around building this and integrating. We integrate with their own core systems and all this stuff. So, it’s changed dramatically.

Tobias: Do you still use it as a screener for banks to find undervalued banks?

Nate: I have poked around with that. One thing I found, and this is a secret I’ll just let out. But most of these small banks, the time difference between when they release their financials to the FDIC and when you receive your annual report or letter in the mail, sometimes is between like a month and two or three months. And so, if you’re just able to look at that information as it comes out, you have an enormous advantage on anyone else who’s waiting for the report in the mail.

Tobias: That’s a pretty good ad for your service.

Nate: It is. We don’t really do much with the investing stuff now. We’ve looked at risk, we had some risk characteristics. One thing that I thought was really interesting– In terms of valuation, when we had the product inside the Bloomberg Terminal, we wanted to do some valuation stuff on bank. Let me think what we had, we had three models. It was a relative model based on price to book, price to earnings. It was a dividend discount model. And then, it was this takeout model that we had. So we had each model on the page and the value, and then you could adjust all the inputs. And then, we had an average of those three, and that was the average valuation, what it should be.

So, the thing I found crazy, I started to run some stats on these is, of the banks we covered, and we had like 1200 at the time that were publicly listed, the average price of the model of what it’s “fair value” should be was within about 10% of the stock price for 90% plus banks. What that means is for about 90% of the market, it was right within a band of fair value. If you adjusted these inputs just a little bit, it would be almost exactly what the price is. So, it’s one of those– the market was pretty fairly priced and is pretty efficient. And then, you could go digging in that last 10%. Usually in there, it was either the assumptions were wildly incorrect, or something else was happening. That was an advantage to– you could take advantage of that by finding something in there.

Tobias: Have those opportunities gone away? Why not continue to pursue them?

Nate: It was really the ongoing cost of being on the Terminal. But in terms of the opportunities in banks– right now they’ve been written off. In some ways, you could say the market is correct because with rates where they are– I just saw that headline before we started talking that mortgage rates hit 2.98%. It’s going to be very hard for a bank to make money lending at 2.8, 2.9, 2.7, because once it drops a little bit more, you’re basically lending money for no return. So, then you have to go into commercial mortgages to make more. What we’re seeing right now is like 4, 4.2.

Interestingly, commercial rates have not really dropped. Year over year, they’re about the same from what I’ve seen, except for some outlier banks kind of buying market share. But that’s really difficult. I don’t know if you’ve ever looked at the Australian banks. I mean, they lend money–

Tobias: There’s only big four Australian banks.

Nate: Yeah. They make almost no money on lending money because rates have just been so low for so long. We might be headed towards that same thing. Now, you have to make all your money on other products.

Tobias: And those other products are riskier? Is that the problem?

Nate: Well, some of the products would be like overdraft and credit cards. But what’s crazy is, ramping up to this year, JPMorgan kept showing all sorts of great growth, they had earnings beats, and if you dug into that, a lot of it was on consumer lending, so they were pumping up consumer lending. And you make a bunch of– [crosstalk]

Tobias: Is that mostly unsecured?

Nate: Unsecured stuff, yes. Credit cards, personal loans. Now, they put out a press release and it was, “Hey, we have this enormous credit loss provision on our consumer credit because it’s deteriorating quickly.” Well, that was the rocket fuel on the way up. Now, that’s a problem because the marginal borrower is terrible at the top of the cycle. There’s an analogy I heard that bears repeating for banks. They said, bank lending is like going to a bar. It’s not the first drink of the night that gets you in trouble. It’s the shots of tequila as you’re ready to walk out the door, that are the problem.

It’s so perfect because at the top of the cycle right as you’re ready to leave the bar, you say, “I’ll take a couple of shots.” That’s the problem. That’s what messes you up. Versus, if right before that you would have said, “I think I’m done, I’m just going to go home,” you would have been fine. That’s the difference between banks that they lend into disaster versus ones that step away.

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