A recent survey by Promontory Interfinancial Network revealed that roughly 60% of bank executives expect the economic fallout from the COVID-19 pandemic to continue through the second half of 2021, and about one-third said it will linger into 2022, or beyond. As one executive told American Banker, banks should expect to take credit losses into 2022.
This is not great news for investors, but there are some companies that serve specific niches within the industry that have outperformed, and should continue to. Here are two on my radar.
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Green Dot soars providing banking as a service
Green Dot (GDOT 1.81%) has seen explosive growth this year, with its stock price up 124% year to date through Wednesday's close. Not only is Green Dot one of the world's largest providers of prepaid debit cards, it is also a chartered bank, providing banking as a service (BaaS) for clients like Walmart, Intuit's QuickBooks, and Kabbage, which use Green Dot's platform to design their own banking solutions for customers.
The company generates most of its revenue through fees -- including user fees for the card, interchange fees for merchants, and BaaS fees for its banking partners. The account services segment -- which includes prepaid cards, debit cards, consumer and small-business checking accounts, secured credit cards, payroll debit cards, and gift cards -- accounted for $255 million of its $316 million in operating revenue in the second quarter. Account services saw an 18% increase in revenue, year over year.
Green Dot's revenue growth was spurred by its BaaS business, interim CFO Jess Unruh said on the second-quarter earnings call. The number of direct-deposit active accounts grew from 2.3 million a year ago to 3.1 million in the second quarter. Gross dollar volume from direct deposit sources jumped 35% year over year to $10.5 billion. Total operating revenue was up 13% to $316 million in the second quarter. Overall, operating revenue was up 13% to $316 million. BaaS should drive continued growth for Green Dot. In the past quarter, Green Dot reupped with Walmart on the Walmart Money Card, issued by Green Dot Bank. It has a number of new and updated features, including direct deposit, 2% high yield savings, and free cash deposits.
Green Dot also signed agreements with small business and consumer lender Kabbage and Inuit QuickBooks, which makes small business accounting software. "Through these new partnerships with Intuit and Kabbage, we are positioning Green Dot to serve America's 30 million plus small businesses," president and CEO Dan Henry said on the Q1 earnings call.
Henry, who was hired in April, sees the company's banking charter as its key differentiator.
"Do anything in the payment space, I'm sorry, fintech space, you have to have access to the nation's banking system. So, if every payment/fintech company need[s] to bank, why would we, as one of the only fintechs that owns a bank, consider selling?" Henry said in the first-quarter earnings call, shortly after he was hired. "It is a strategic asset, a competitive differentiator and a source of immense potential value."
In June, Green Dot hired 30-year banking veteran Greg Quarles as CEO of Green Dot Bank to help maximize one of its biggest competitive advantages.
Signature Bank expands to West coast
Signature Bank (SBNY) has been one of the top-performing banks of the last 10 years. The New York-based bank, with $60 billion in assets as of June 30, is the 38th-largest in the U.S. It has carved out a nice little niche for itself that has served it well and should continue to bear fruit into this decade.
Signature offers private banking services to high-net-worth individuals and businesses, with no retail banking operations. It has long served the New York City area, including Long Island and Connecticut, where there is a great concentration of wealth. In 2017, the company expanded into San Francisco, another wealth center.
In July of this year, Signature announced an ambitious plan to expand into the Los Angeles area. The bank will open four new private client banking offices in Woodland Hills, Newport Beach, Beverly Hills, and Ontario. Between San Francisco and Los Angeles, Signature will have 19 private banking teams.
While net income was down 20% to $117 million due to $93 million provision for credit loss -- a soaring increase from $5 million in the second quarter of 2019 -- Signature had a strong quarter with a record growth in deposits (up 33% to $50.2 billion) and loans (up 10% to $45 billion). Loan growth was driven by commercial and industrial loans, primarily capital call facilities to private equity funds, which is bridge short-term funding. Net interest margin increased year over year to 2.77% from 2.74%.
Also promising is a reduction of payment deferrals the bank is seeing. As of July 15, 60% of the loans that had their payment deferral come due after three months resumed payments of the loans.
Signature's single-point-of-contact model has been extremely beneficial, particularly during this pandemic-fueled crisis, as clients appreciate the one-on-one service of a trusted advisor with contacts and experience. And with the rapid expansion to the West Coast, Signature should see continued growth. Investors in the high-net-worth space have the liquidity to ride out the pandemic and are more likely to see the downturn as a buying opportunity to invest.
The stock is down 25% this year, but analysts are bullish on its growth prospects, bucking the trend among banks.
