The embattled Berkshire Hills Bancorp (BHLB 1.07%) has rolled out a new transformation plan to attempt to turn the bank around after a dismal year in 2020 and lots of management turnover in recent years. The $13 billion asset bank in Boston came under fire last year from activist investor HoldCo Asset Management for not exploring a sale of the bank, and for not repurchasing shares when the bank traded significantly below tangible book value (equity minus intangible assets and goodwill).
Now, a co-founder of HoldCo has joined Berkshire's board and struck a cooperation agreement with the bank. Additionally, Berkshire has a new CEO and CFO in place. While the transformation plan would greatly improve the bank's performance, there is nothing particularly exciting about it in my opinion. Here's why.
The new plan, called Berkshire's Exciting Strategic Transformation (BEST), has three pillars called optimize, digitize, and enhance. The bank plans to continue to optimize Berkshire's geographic footprint, which it has already been doing through branch sales and branch closures, and to optimize processes, products, and pricing. Berkshire wants to enhance its balance sheet through more profitable lending by doing more business banking, lending through the U.S. Small Business Administration (SBA), and asset-based lending, while also continuing to grow wealth management.
Then Berkshire wants to digitize a lot of its platforms and customer experiences, and make partnerships with fintech companies. Continuing to grow and build its MyBanker program, in which mobile personal bankers meet the clients where they are to make banking more convenient and personal, is also a big part of the overall strategy.
Ultimately, in three years, Berkshire expects execution of the plan to deliver a return on tangible common equity (ROTCE) of between 10% and 12%, a return on assets (ROA) of roughly 1%, and an efficiency ratio (expenses expressed as percentage of revenue, so lower is better) of roughly 60%. There's nothing wrong with those numbers, and the bank would surely be trading higher right now if it could hit those. I also have nothing against new management, as they are walking into a difficult situation, but it's hard to be fully confident that Berkshire can even really pull off this plan.
For one, Berkshire has been operating this MyBanker program for a number of years now, and hasn't really seen the benefits -- at least on paper. Wealth management fees at the bank fell in 2019 and 2020, and the bank's deposit base is still filled with too many higher-cost deposits and higher-cost borrowings.
As for loans, commercial and industrial loans, which is the category containing business loans, made up less than 20% of total loans at the end of the first quarter of 2021. On the SBA lending front, Berkshire Bank ranked 13th in Massachusetts in terms of the number of SBA loans made in the 2020 fiscal year.
Berkshire is also going to need to penetrate markets like Boston, where it is headquartered, that it has yet to really gain traction in. In 2020, the bank held just a 0.13% deposit market share in the Boston-Cambridge-Newton metropolitan statistic area (MSA). It only has six branches in the MSA, but is behind many other local banks with a similar number of offices.
Berkshire is going to have to outperform in a competitive banking environment in which competition for loans will be fierce. The bank also said in its presentation that it will need to get "better before bigger," so while it does this, it doesn't seem like it will be growing and adding scale, while its competitors are.
Are the end results even worth it?
Let's just say Berkshire executes on this three-year plan and achieves a 10% to 12% ROTCE, a 1% ROA, and a 60% efficiency ratio. Will that even be enough to outperform the competition? Take a look at the numbers several of the bank's competitors put up in 2019. I chose to use 2019 numbers because the pandemic, and a goodwill impairment charge Berkshire took, along with Eastern's initial public offering and charity contribution, really threw off the numbers negatively in 2020.
|Bank (2019)||Assets||ROE||ROA||Efficiency Ratio|
|Eastern Bankshares (EBC 1.43%)||$11.6B||8.75%||1.18%||69.53%|
|Independent Bank Corp. (INDB 1.36%)||$11.4B||10.85%||1.52%||55.92%|
|Brookline Bancorp (BRKL 0.70%)||$7.9B||9.56%||1.15%||55.63%|
As you can see, Berkshire is trying to hit an ROE, ROA, and efficiency ratio that its competitors are already close to or surpassing. And Berkshire is now in a much worse position than it was in 2019, while Eastern and Independent are far better off, and Brookline looks to be in solid shape as well.
With recent acquisitions, Eastern and Independent will soon jump to $20 billion or more in assets. Independent will soon have a sub-50% efficiency ratio, while Eastern's efficiency ratio is trending better and the bank will likely achieve a very high ROE and ROA once it deploys all of its excess capital.
Another interesting thing to look at is the two banks Independent and Eastern recently bought, both local Boston banks that were seen as competitors to Berkshire.
|Bank (2019)||Assets||ROE||ROA||Efficiency Ratio|
|Century Bancorp (CNBKA)||$5.5B||12.44%||0.76%||58.4%|
|Meridian Bancorp (EBSB)||$6.3B||9.56%||1.06%||53.7%|
Again, Century and Meridian put up much better profitability, and had similar efficiency ratios to Berkshire in 2019. While all of Berkshire's competitors put themselves in better shape or sold the bank following 2020, Berkshire really went backwards -- no wonder investors are upset that Berkshire didn't consider a sale.
What's the upside?
Berkshire's plan would sound a whole lot better if it traded below tangible book value. But recently trading at $27 per share, Berkshire trades around 120% to tangible book value. That valuation certainly trails its peers and the sector as a whole, but is not so bad that this might turn into a double or triple your money situation if Berkshire executes on its plan in three years.
There is surely upside from here if Berkshire can execute, but I'm not sure it's worth the risk. Management and the bank now face a long slog, and there are really a whole bunch of better banks to invest in that can more easily generate better profitability and efficiency.