Drip
Portfolio Report
Wrapping up NationsBank
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 14, 1998) --NationsBank (NYSE: NB) stands a strong chance of being our choice for the Drip Port because of its standing as an emerging universal bank. A universal bank combines wholesale and retail banking functions, both of which complement each other and increase the profitability of their complements. The wholesale banking side benefits from gathering customer assets and building critical mass for the wholesale side of things, while having the wholesale operations under the same roof as the retail operations allows the company to offer broader retail operations and at a lower cost to consumers.
In some ways, it's no different than Henry Ford's putting together of a vertical operation all the way from mining iron ore to assembling autos. However, each unit in the banking company's organization has to perform well as an individual unit. Certain parts will earn far less on the equity invested in them than other parts (compare asset management versus branch banking), but they're still earning their cost of equity. And when you put them back together again for the consolidated picture, you get a fine return on capital when things are done well. Citicorp (NYSE: CCI) is perhaps the master at all of this and Chase Manhattan (NYSE: CMB) and its various predecessors have tried for the brass ring in the past only to get burned in financing takeovers and some really bad real estate deals in the late 80s. Chase is increasing its commitment to capital markets activities these days, as is NationsBank, which is where a good part of its earnings growth is coming from.
Some investors wonder if this won't all end badly for the larger commercial banks out there. After all, Nations is getting into some pretty large loan exposures with bridge loans for mergers & acquisitions. Despite the mechanics of syndicating loan participations and cleaning the balance sheet with securitizations, there still is risk in highly leverage transactions and sub-prime lending. Despite that, NationsBank is controlling its risks and building excess capital. With a cash ROA solidly into the 1.6% range, the company can dial back on its leverage and still achieve a highly satisfactory spread between its cost of equity and return on equity. Over the long term, I personally believe in universal banking and the power of NationsBank to create a very strong national consumer brand and wholesale powerhouse. The merger with BankAmerica will enhance these characteristics and creates a compelling DRIP choice for us.
Below, I have consolidated the financial results for NationsBank and BankAmerica, through the first quarter. I have had to make estimates on certain line items, otherwise these figures come straight from their federal filings over the preceding 12 months. Compare the results below with the recently-reported NationsBank results. As you can see, the combined company still trades at a discount on a forward-looking basis, though it has closed the valuation gap with its peers on a trailing basis. The forward discount is the result of investor skepticism over whether the combined company can grow earnings at the rate forecast by analysts and can execute to plan. Nations hasn't disappointed on execution over the last couple years and I don't expect them to do so in this case. As always, we like a discount and don't mind underpaying for quality, to say the least. That has worked so far in 1998 investing in NationsBank. Going forward, the company's financials should continue to reflect the positive effects of the Barnett merger and continuing guidance on plans for the BankAmerica merger.
Price/Valuation
Share Price.....$87 13/16
Market Cap.....$157,026.99
Price/Book.....3.48
Price/ Tangible Book.....4.95
BVPS.....$25.22
Price/Assets.....27.08%
Price/Net Loans.....46.42%
Price/Deposits.....45.66%
Price/Tangible Assets.....27.72%
Price/Revenues.....5.15
P/E.....21.89
Amortization-Adjusted P/E.....20.10
Discount/Premium to Group.....-3.5%
EPS.....$4.01
Cash EPS.....$4.37
Diluted Sharecount.....1,788.21
1998 EPS Estimate.....$4.52
1999 EPS Estimate.....$5.85
Multiple on 1998 Est......19.44
Multiple on 1999 Est......15.01
Amort-Adjusted Multiple on 1999.....14.15
Discount/Premium to Group.....-14.6%
Capital Productivity/Efficiency
Asset Turnover2.....5.48%
Asset Turnover.....5.35%
ROE2.....17.37%
ROE.....15.95%
Amortization Adjusted ROE.....24.83%
ROA.....1.37%
ROA2.....1.403%
Net margin2.....25.60%
Net Margin.....23.51%
Efficiency Ratio.....58.42%
Interest Income/AEA.....8.03%
Interest Expense/AEA.....3.76%
Net Interest Margin.....4.27%
Net Share Buybacks (Including preferred).....$6,585.0
Dividends on Common.....$1,849.0
Retention Rate.....76.33%
Payout Ratio on Amort. Adjusted Earnings.....23.67%
Internal Capital Generation Rate.....18.95%
Owners' Yield.....5.37%
Balance Sheet
Cash & Nonearning Assets.....$85,574.0
Cash & Nonearning Last Year.....$74,943.0
Long Term Debt.....$49,180.0
Shareholder's Equity.....$45,104.0
Last Year Equity.....$44,844.0
Tangible Equity.....$31,702.0
Last Year Tangible Equity.....$31,227.0
Tangible Assets.....$566,537.0
Last Year Tangible Assets.....$546,841.00
Total Assets.....$579,939.0
Earning Assets
Last Year Assets.....$560,458.0
Total Liabilities.....$532,623.0
Goodwill.....$13,402.0
Last Year's Goodwill.....$13,617.0
Gross Loans.....$345,006.0
Loan Loss Reserves.....$6,762.0
Loan Loss Reserves %.....1.96%
Leverage
Equity/Tangible Assets.....7.96%
Average Equity/Average Assets.....7.89%
Average Equity/Average Assets (Tangible).....5.65%
Assets/Equity.....12.68
Avg. Assets/Avg. Equity (Tangible).....17.69
Loans to Deposits.....100.31%
LT Debt/Equity.....109.04%
Leveraged Capital Ratio.....6.25%
Tier 1 Capital Ratio.....7.15%
Total Risk Based Capital Ratio.....11.30%
Income Statement
Revenues.....$30,514.00
Interest Income (TTM).....$38,234.0
Interest Expense (TTM).....$20,910.0
Net Interest Income.....$17,324.0
Provision for Loan Losses.....$2,210.0
Noninterest Income (TTM).....$13,190.0
Noninterest Expense (TTM).....$18,464.0
Net Income for Common (TTM).....$7,173.7
Amortization Adjusted Earnings.....$7,811.9
Noninterest income/interest income.....34.5%
Noninterest income/revenues.....43.23%
Noninterest income/NII.....76.14%
Amort. Adjusted Net/Revs......25.60%
Amortization of Goodwill.....$638.2
Credit Quality
Nonperforming Loans
Nonperforming Assets.....$2,572.0
Loan Loss Provision/Net Interest Income.....12.76%
Loan Loss Provision/Gross Loans.....0.64%
Charge Offs.....$1,580.0
Recoveries
Net Charge Offs.....$609.00
Nonperforming Assets Ratio.....0.75%
Reserves/Nonperforming Loans.....262.91%
Months Charge-Offs in Reserves.....51.4
Loan Loss Provision/Net Charge Offs.....362.89%
Deposits
Deposits.....$343,936.0
Noninterest bearing deposits.....$77,914.0
Noninterest bearing deposits last year.....$17,208.6
Noninterest deposits/deposits.....22.65%
Deposits/Liabilities.....64.57%
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