Boston Private Financial Holdings (Ticker: BPFH):
Inflection Point or Blood in the Water?
By: Ryan Johnston, student at Marquette
University
Disclosure: The AIM Equity Fund
currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Brief Firm Overview: Boston
Private is a wealth management and private banking company that operates
affiliates in New England, New York, Los Angeles and the San Francisco Bay
Area. The firm positions its affiliates to serve the high net worth marketplace
with high quality products and services of unique appeal to private clients.
Boston Private generates income from three separate revenue streams including
Private Banking (60%); Wealth Advisory, including Wealth Management & Trust
Services (25%); and Investment Management (15%).
Summary
•
The hedge funds cometh. Like sharks, hedge funds smell blood and are seeing an
opportunity to collect a premium on the firm, which may be acquired. Over the
past six months more than 5% of shares outstanding have been gobbled up by
hedge funds; leading the way is Millennium owning almost 5% of shares
outstanding.
•
BPFH has been struggling with stagnating revenues and compressing margins. As
of 4Q 2015 net interest margin (NIM) stood at 2.9%, which has significantly sank
over the past five years from 3.3%. Return on assets is 0.94%, which is well below
the industry average of roughly 1.2%.
•
With the Fed’s indecisiveness, banks are generally being punished because of
the possibility of a prolonged period of ultra low interest rates. For Boston
Private, this is a one-two punch both punishing their yields on loans and by
ensuing volatility in the markets stressing the firm’s wealth management
efforts.
Boston Private Financial. (NASDAQ: BPFH) The AIM fund originally initiated
coverage on Boston Private during early October 2014. At that time we were
encouraged by the firm’s growth potential with an acquisition, which would help
grow the firm’s wealth management capabilities. Also, there were several macro
tailwinds like strong capital markets and a more hawkish Fed. Now everything
seems to have reversed with volatile capital markets and a concerned Fed. This
has caused the firm to suffer from decreasing AUM, which has slid by $2.2
billion to $27.6 billion. Over the past eight quarters the firm has only
recorded one period of positive inflows.
Even
with the decline in AUM, Boston Private’s non-interest revenues have been able
to grow at a 5 year CAGR of nearly 10%. The firm has also seen modest loan
growth at about 8% YoY. While this is encouraging, over the past three years
expenses have grown by nearly 6%, causing the firm’s pretax margin to settle at
24%. Expenses are being driven by new
hiring trends after a handful of portfolio managers left the firm in 2014 after
the Banyan deal.
Lastly,
if there is not already enough cause for concern, Boston Private’s loan loss
provision has been declining at a concerning rate and was a negative $1.7
million as of the fourth quarter. This is best illustrated with the firm’s
allowance for loan losses to total loans, which was 2.1% in 2011 but is now
1.4%. This demonstrates an unsustainable trend and going forward the provision
will have to increase.
What has the stock done lately?
Since
the Domestic AIM fund initiated coverage, the stock has closed as high as $14
on December 29, 2014. This was during the acquisition of Banyan Partners and
the market was viewing the deal as a positive growth driver. Since then, Boston
Private has established a trading range of roughly $9 - $11, which is down 16%
since the fund added the stock in mid-October.
Past Year Performance: Year-to-date the stock is down 12% and
is down 20% over the last 12 months. After reconstructing a DDM and P/E
multiple, the firm is trading at a 10% discount. Assumptions behind this lower value
are compressing margins, a higher loan loss provision, more volatile capital
markets, and a lower yielding environment. The main revenue growth drivers will
be above average investment performance and the growth the firm’s advisory
unit. I believe these updated assumptions are totally within reason and should
be fully baked into the stock price in the next one to two years.
Source: FactSet
Takeaway
So
why are we still holding Boston Private? Our sector team believes there may be
a unique opportunity to harvest a premium on an acquisition. Boston Private’s management
team has made it clear they are not shopping around to be bought out, but they
are not against it either. The banking M&A market is starting to heat up
with banks that have their costs under control looking to grow their
operations.
BPFH is a great target since it is currently trading at 1.2x book
value. We will be diligently following the firm to watch for any further
deterioration in the firm’s fundamentals and if this occurs we will sell. We believe
this has a conservative 10% upside, which is built around the premises of
subpar fundamentals and the potential to be acquired.
