Wall Street just improved this stock, and I think there is more room to grow

National Bank of the Valley (NASDAQ: VLY) recently announced the acquisition of the US subsidiary of Bank Leumi Israel (OTC: BLMIF), a move that will bring the New Jersey-based bank to more than $ 50 billion in assets. The announcement prompted an analyst from Citigroup to move Valley National’s stock from sell to neutral, while increasing its price target by over 16% to $ 14 per share.

While the upgrade is nice to see, I think this acquisition is very exciting for Valley National and could translate into even more upside in the long run. Here’s why.

Enter the space of technology and adventure

In numbers, this case is decent, although nothing out of the ordinary. Valley National plans to pay approximately $ 1.15 billion to Bank Leumi USA in a mostly stock exchange transaction that values ​​the subsidiary at 130% of tangible book value (TBV) (what a bank would be worth if it were. immediately liquidated). Valley National plans to eventually withdraw nearly 33% of Leumi’s spending base. The deal will minimize Valley National’s TBV, with less than a year payback, and the deal will increase revenues by approximately 7% in 2023 after all cost savings are implemented.

But what’s most exciting for me about this deal is that it gives Valley National a solid breakthrough into what can be a very profitable business in banking technology and venture capital. . Leumi has $ 60 million in Capital Call Line of Credit loans, which are short-term loans to venture capital firms that help them execute their investments quickly. These loans are generally quite good from a credit standpoint and can grow at times when loan growth is minimal. For example, although loan growth at most banks has stagnated since the onset of the pandemic, selected banks with callable lines of credit have experienced strong growth in this segment as private markets have exploded. .

Image source: Getty Images.

Leumi also offers a number of other attractive business lines including mid-market commercial and industrial loans; construction, health, treasury and cash management products; and a private bank for high net worth individuals and wealth management. About 20% of Leumi’s income comes from fees, which brings a nice diversity of income.

Technology and venture capital can be a very attractive banking segment because they are high quality borrowers. Venture capital firms also have many high net worth individual borrowers to whom the bank can sell other products, such as mortgages and wealth management. The company is also a good deposit-taking machine, as 58% of Leumi’s deposits are zero-cost, non-interest-bearing deposits, which will help improve Valley National’s deposit base.

Now, technology and venture capital banking is not the easiest segment to approach. But Leumi is giving Valley National a good start because it will give the bank access to many start-ups from Israel, often referred to as “Start-Up Nation”. In the first six months of 2021, Israeli startups raised record capital of $ 10.5 billion. Valley National CEO Ira Robbins said on a conference call following the acquisition announcement that Leumi has a 50% share of the technology market in Israel and that Valley National will be the “bank. America of Choice ”when companies move from Israel to the United States. two directors are joining Valley National’s board of directors and Robbins said he also wants to further develop Leumi’s business in some of its more similar markets, such as New York and Florida.

At the moment, Leumi does not have a large number of start-up clients, which can be a good thing at the start as these can be risky clients for a bank. But the door could be opened for Valley National to bank those customers in the future. Usually, when banks serve these customers, they are given sweeteners to take the risk on, such as warrants that pay off generously if a startup ends up going public, so there is potential for that down the line. .

Even more at Valley National

With shares currently trading at $ 13.52, Valley National is trading around 178% with TBV, which isn’t exactly cheap. But as I mentioned earlier, the banks that have successfully implemented venture capital banking and technology banking, like Silicon Valley Bank and Signature Bank, were rewarded with strong valuations. These banks are way ahead of Valley National, but the bottom line is that a niche banking segment like technology and venture capital can be extremely beneficial for valuation if executed properly. With Valley National able to build on the unit already established in Leumi, it should be easier for them to succeed in the segment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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