After a difficult year in 2020, most banks are looking to turn the corner and improve profitability in 2021. But the nearly $74 billion asset Signature Bank (SBNY) in New York City looks poised to break out and chart a new trajectory for growth and profits. The bank had a phenomenal fourth quarter to close out 2020 and its relatively new lending and payments products are quickly gaining traction. This makes Signature Bank an attractive play for the future, even with the stock recently trading at 1.5 times book value. Here's why.
A tremendous fourth quarter
For the full year of 2020, Signature Bank's earnings dropped about 8.4% compared to 2019. But the bank's fourth-quarter earnings of $3.26 per share set new records, up more than 18% from the fourth quarter of 2019.
The bank achieved this by growing net interest income, the overall profit that banks make on loans, by roughly $56 million in the fourth quarter compared to the same period the year before. On the year, net interest income grew by more than $200 million. Now, a lot of this came from deposit costs repricing downward after the Federal Reserve abruptly lowered rates last March. But interest income also grew in the fourth quarter and in 2020 on the whole, which is a huge achievement in the ultra-low-rate environment.
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The bank was able to increase net interest income through incredible growth in 2020. Total assets at the bank in 2020 grew by almost $24 billion, or roughly 46%, and baked into that growth was solid loan growth outside of the Paycheck Protection Program (PPP), which very few banks experienced in 2020.
The fourth quarter drove a lot of this overall growth. Total deposits in 2020 grew close to $23 billion and $9 billion of those came in the fourth quarter alone. Meanwhile, total loans excluding those from the PPP grew $7.8 billion in 2020, $2.7 billion of which came in the fourth quarter.
What attributed to the success
Signature Bank has really turned into a niche bank in recent years, serving audiences such as the private equity and venture capital communities, as well as cryptocurrency clients.
In 2018 and 2019, Signature launched its fund banking division, which provides special lines of credit and other loans specifically for the private equity and venture capital communities. The private markets have had incredible levels of dry powder, as investors scramble to find decent yields in the low-rate environment. Signature Bank's president and CEO, Joseph DePaolo, said on the company's recent earnings call that the fund banking division delivered the majority of the loan growth in 2020.
The bank has also waded into the world of cryptocurrency and blockchain. At the very start of 2019, the bank launched its Signet platform, which leverages blockchain technology to create a real-time digital payments platform that clears and settles payments 24 hours a day, seven days a week, and 365 days a year. This allows two commercial clients on the network to move funds between one another at any day or time for free, although clients are encouraged to maintain balances of $250,000 or more in their accounts. This system is particularly useful for traders of digital assets such as bitcoin because cryptocurrencies trade around the clock.
The Signet system is very effective at bringing in lots of deposits, with DePaolo saying the digital banking team brought in about $8 billion of new deposits in 2020. And I suspect many of those are non-interest-bearing deposits, which are the best type of deposits for a bank because they don't cost anything and tend to be stickier and not as sensitive to interest rates.
Looking ahead to 2021
Expect the momentum from the fourth quarter to continue. As one analyst mentioned on Signature's recent earnings call, management at the bank used to talk about growing total assets $3 billion to $5 billion a year. Now, Senior Executive Vice President Eric Howell thinks the bank can grow assets in the realm of $8 billion to $16 billion a year, driven by the ability to grow its securities portfolio by $1 billion to $2 billion per quarter, and loans by another $1 billion to $2 billion per quarter. This kind of growth should lead to net interest income growth in 2021, which not many banks expect to achieve given the low-rate environment and lack of loan activity to start the year, with the economy still facing uncertainty.
Additionally, some of the bank's fee income businesses are just starting to gain traction. DePaolo noted that digital clients that use Signet are generating very little fee income right now. While DePaolo acknowledged that fee income won't start coming in until the Signet ecosystem is bigger, this business could be a long-term driver of fee income, as evidenced at other banks that run a similar payments system. Overall, Signature should have a nice year in 2021 and its long-term prospects beyond that are great as well.
