Normally, I don't have a lot of use for activist shareholders who try to air a company's dirty laundry in the press. For instance, CalPERS issued its hit list of underperforming companies and named Sovereign Bancorp (NYSE: SOV) on it. Now, I don't disagree that Sovereign isn't particularly well run, and I also don't disagree that some of the company's practices are questionable. But I in turn do question CalPERS using stock market underperformance as one of its gripes.
Even so, it's possible that some agitation from within could help this bank. Specifically, I speak of the impending ownership stake that BancoSantander (NYSE: STD) will take, as well as a resolution with Relational Investors that will place a representative of this asset manager on Sovereign's board.
So let's look at the earnings and see whether we can divine just why this midsized Northeastern bank is getting so much attention.
Reported net income fell 3% this quarter, and the drop was even larger (9%) according to the company's so-called "cash earnings" calculations. Returns on assets and equity were both pretty weak. Net interest income was down 1%, and the net interest margin fell from an already poor 3.34% to 3%.
At least there's a little spot of good news on the non-interest income side -- while reported income was up less than 2%, income here was up 8% before accounting for gains on securities. I was also encouraged by what looked like reasonably strong loan growth, though growth in average core deposits was pretty weak.
What makes me nervous, though, is that it seems like a lot of the positive aspects to this story concern adding new people to the mix -- whether it's the representative from Relational or the CEO of Independence Community Bank (Nasdaq: ICBC), which Sovereign is acquiring. In other words, the old team wasn't getting the job done, but I'm supposed to be excited because there are new people coming in?
To be fair, I think the new folks can make a difference. And there's certainly ample room for improvement in both the bank's operations and valuation. A simple return to parity would mean pretty good gains (for a bank stock), so investors with both a tolerance for risk and a belief that Sovereign can do better might just want to check this one out.
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Fool contributor
Stephen Simpson
has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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