1. BUYSELL
Financial Sector
American Express PacWest Bancorp
Current Price: $77.99
Target Price:$71-$74
Current Price: $45.32
Target
Price:$49.67~$51.69
Krause Fund Spring
2015
2. Economic outlook
Real GDP：
stable growth to 3.1% in two years.
The Federal Effective Rate:
is expected to be 0-0.25% in the short term and reach to around 3% in three years.
Krause Fund Spring
2015
3. Market Competition
AXP is still the leader in consumer finance industry
Current trends: AXP got a hit, years to recover
Termination of some co-branded relationship:
Costco: 20% of Amex’s worldwide loans and about 10% of world cards in force
Visa-exclusive credit card partner; Citibank - Costco-branded credit card
Jet Blue
Metrics American
Express
Discover Capital One Bank of
America
JPMorgan Citigroup
Market Cap 79.24B 26.05B 44.20B 164.5B 233.20B 162.21B
Market share 20% 7% 14% 18% 17% 9%
EPS (ttm) 77.99 58.39 80.44 15.64 62.60 52.9
P/E 13.66 12.00 10.60 22.80 11.47 21.37
ROE 28.48% 20.49% 10.21% 3.51% 9.84% 3.93%
Net interest
margin 2014
4.3% 9.765% 6.64% 2.25% 2.18% 2.90%
Krause Fund Spring
2015
4. American Express’ business model is
challenged
2/3 Core functions of American Express are challenged by Google wallet,Amazon AllSaints and Apple
Pay
Transaction Media: provide connections between consumers and merchants (Now challenged)
Trust provider: Guarantee each party can finish the trade with honor (Now challenged)
Financial services provide: Offer credits and loans for consumers to make purchase (Coming soon)
Krause Fund Spring
2015
6. Valuation Model
Key Assumptions:
Short Term: (1-2 years) Lost partnership with Costco
Medium Term: (2-5years) Interest rate change
Long Term:(5-10 years) Competition from Google,
Amazon, Apple
Model Target Price % difference with
current price of
$77.6
DCF&EP $73.23 5.63%
DDM $109.37 140%
Krause Fund Spring
2015
7. Regional-bank Industry Overview
Benefits from the rebound of the U.S.
economy
Outperforms in the financial industry and is
expected to continuously grow
Minimizes the impact from the fluctuating
exchange rate between countries
Krause Fund Spring
2015
Source from FactSet
8. PacWest Bancorp Business Model
Community Banking in California
80 full-service branches
Cross selling
National lending
Support middle to small businesses
Highly diversified by loan type, industry
and geography
Krause Fund Spring
2015
Map of PacWest Bancorp’s branches. Source from PacWest Bancorp
Website
9. Financial Highlights
• Highly Profitable
Industry Leading Net Interest Margin: 5.89%
• Effective Management
Low Efficiency ratio: 40.40%
• Solid Credit Quality
Non-performing Asset (NPA) ratio: 1.04%
• Strong Capital Level
Tangible Common Equity (TCE)
Ratio:12.20%
Tangible book value per share: $17.36
Net Interest Margin Comparison
Krause Fund Spring
2015
10. Investment Positives and Negatives
Growing company with robust
earnings
Diversified loan portfolio
Negatives
Krause Fund Spring
2015
Positives
Acquisition plans
Federal funds rate
11. Valuation Model
Model Target Price % higher than
current price of
$45.32
DCF&EP $51.69 14.06%
DDM $49.67 9.60%
Krause Fund Spring
2015
Key Assumptions:
Cost of Equity: 7.54%
CV growth: 2%
Interest Yield
Dividend Payout Ratio:60%~80%
12. BUYSELL
Financial Sector
American Express PacWest Bancorp
Current Price: $77.99
Target Price:$71-$74
Current Price: $45.32
Target
Price:$49.67~$51.69
Krause Fund Spring
2015
From our analysis, we think technology will totally change people’s way of doing business.
In old days, credit card/cash act as a media to connect consumers and merchants. Credit card also bring trust between consumers and merchants, so consumers will to use credit card to do business with others.
However, now days people can go to Amazon/Google at their home to do business with other people around world, amazon is becoming a more powerful media than credit card for consumers. Amazon/ Alibaba also provide 7 days or even longer no excuse returning policies to protect consumers right, the no excuse returning policy is trying to gain consumers trust on using amazon. Even though, now we can still use credit to finish our online payments, but amazon and Google starts to compete in online transaction
Warehouse rents and hotel revenue per available room (RevPAR) are expected to be leaders among the major property types, growing by an average of 3.6 percent and 5.3 percent over the three year period
map
Here are some financial highlights for PacWest Bancorp. First of all, PacWest has the industry leading net interest margin, which is 5.89%. The graph on your right side is showing PacWest’s quarterly net interest margin from 2012 to 2014. The green line and blue line are pacwest’s reported and core net interest margin respectively. The red line below is the average net interest margin of all mid-cap banks., which is about 2 percent lower than PacWest
Second, the company has low efficiency ratio of 40.4%. Its effective management is mainly due to its focus on the regional base and their special business model.
There is a metric called NPA ratio, are those assets for which interest is overdue for more than 90 days. NPA ratio is used as a measure of the overall quality of the bank's loan book. The NPA ratio of 1.04% is lower than the average NPA ratio of all U.S. banks of 1.35% in 2014. (http://www.bankregdata.com/allAQmet.asp?met=NPA#)
In addition, pacwest has a strong capital level. Its tangible common equity ratio is 12.20%. This ratio is popular for evaluating commercial banks’ ability to absorb losses before becoming insolvent. PacWest Bancorp has been met federal bank regulatory agency requirements and regarded as a well-capitalized bank. (10%)
Its tangible book value per share is $17.17 (wells Fargo: 23.24 First Republic Bank; 15.01 )
Wells Fargo: 3.7% First Republic Bank: 5.0%
Efficiency ratio: a ratio of expenses to revenue. Banks desire a low efficiency ratio WFC: 58.10% FRC: 56%
http://www.mckinsey.com/insights/financial_services/a_better_way_to_measure_bank_risk
Measure credit of banks:
Probability of default – this is the possibility of failure to pay over the period stipulated in the contract. The computation for that year may be termed as the projected default rate. 2. Exposure of Credit – how big of an amount will the debt be in case default should occur. 3. Estimated Rate of Recovery – what portion of the debt can be regained through freezing of assets and collateral and the like, should default transpire.
Efficiency: Lower average rate on time deposits
The acquisition they made enable them to buy
Noninterest-bearing deposits is 26% of total deposits.
Accelerated accretion of acquisition discounts from early payoffs of acquisition loans
high yield on loans, leases, and interest-earning assets 6% 4%
http://globenewswire.com/news-release/2015/04/16/725149/10129203/en/PacWest-Bancorp-Announces-Results-for-the-First-Quarter-of-2015.html
Positives:
PacWest Bancorp is currently in a growing stage. Its high net interest margin and diversified loan portfolio are very attractive to investors.
There are some concerns.
PacWest has been ambitious on expanding its banking presence and earning assets through acquisitions. Since 2001, it has acquired 27 banks (and the acquisition became one of its strategies. In 2014, the acquisition of CapitalSource, Inc enabled PacWest to have a good cost structure, asset quality, and overall good performance. Its net earning grew by 274%. The merger introduced the national lending to PacWest portfolio). Most of acquisitions are successful, especially the one in last year, However, due to the uncertainty of pacwest future acquisition plans and the difficulty to incorporate the impacts into our valuation model, we believe it is a concern for stockholders. The other negative is the change of interest rate in the future is likely to challenge PacWest Bancorp’s interest spread.
By taking these investment positives and negatives into account, as well as those key assumptions, we completed our valuation models with the target price in a range from
