The Tech angle to Bank Upside

As we venture through a “dark winter”, there are no sure things in bank investing, but a wrinkle has emerged of late in finding outsized winners. The double and triple opportunities are not all credit-recovery plays like in past cycles, rather the market’s love for fintech is also generating upside in banks helping develop technology. Given that tech analysts typically don’t look at banks and vice versa, close study can bring about happy returns.

The traditional way to find bank doubles: We’ve seen 100%+ moves recently in banks including Cadence (CADE), Texas Capital (TCBI), Berkshire Hills (BHLB) among other traditional credit plays. It seems with the recent vaccine rally however that the number of remaining opportunities here are relatively slim.

The new funnel – tech plays: Fintech isn’t just coding and selling – there has to be a place to hold the deposits migrating away from megabanks, and unless that money is uninsured (meaning, in a 2008 event, poof gone), a smaller bank is involved.

To be clear, we want to ignore banks like Regions that are happy to be “fintech partners”, getting a tiny scrape and basically being used like a cardboard container by a more innovative group of coders and tech bros. Instead we care about the banks that want to own the spread revenue and the technology. They may have picked up some outstanding talent, or have a management team committed to innovation. We will nickname these the “Bank Tech Doubles” or “BTDs”.

Who are some BTDs? The most prominent recent examples are Silicon Valley Bank (SIVB), Silvergate Bank (SI), and Live Oak Bank (LOB).

Live Oak Bank (LOB, actually a triple off lows). Live Oak pays an army of developers to find ways to bank more easily. Its affiliated Finxact technology ran circles around the competition in PPP funding, and Live Oak was involved in several recent multi-bagger fintech investments.

Silvergate Bank (SI), another triple. Silvergate came up with a means to help fund crypto exchanges, as well as to lend against crypto assets. They claim they have the controls in place to monitor collateral.

Silicon Valley Bank (SIVB), “only” a double from the lows… SIVB is much larger and older than the others, and derives much of its value from warrants associated with its technology loan portfolio. It actually saw extreme margin decline during its rally because of a heavy liquidity position.

Who’s next? Some emerging “BTDs” don’t trade often or we are still doing research, so this is a wide angle lens, but a few places to look are:

  1. Banks sharing fees with “challenger banks” that include Chime, Aspiration and Current. Chime and others like it are “finance” apps that look like a bank but don’t actually hold a charter. This segment of the market is exploding. There is big money in sharing the fees these challenger banks generate on debit card swipes or typical monthly fees. A lot of banks take deposits for these “app banks” but few have the technology to ensure card compliance – this is where value lies, but only a few banks do this and they are typically under $10 billion in assets.

2. Banks developing a mobile product to meet a need. We all know that banking technology is typically weak at best, painful at worst. This is because most small to medium sized banks typically use 3 old-school, IBM-style data storage providers that clog innovation (Jack Henry, Fiserv and FIS). Lately a few cloud-based data processors have come to market to replace the legacy bottlenecks, and this will result in a ramp of new and better customer features, from payments to security to ease of use. There are at least 10-15 banks with the potential to monetize this angle.

3. Banks working with crypto. In addition to Silvergate above, a few of these include Metropolitan Bank (MCB) in New York and MVB (MVBF) in West Virginia. There are puts and takes in each situation and the value of these crypto deposits will vary with interest rates, competition, and the crypto assets themselves.

(Whether the individual stocks mentioned above are appropriate for readers depends on his or her risk tolerance and objectives)