Why BankUnited delivers value – GuruFocus.com

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I came across BankUnited Inc. (BKU, Financial) while using the GuruFocus All-in-One Screener while looking for banks whose return on equity exceeds their price-earnings ratio. BankUnited meets these criteria.

After exploring the company further and reading reviews from Royce Investment Partners, I liked what I saw and have since purchased shares. Here are my notes.

BankUnited, with total assets of $36.3 billion as of March 31, is a bank holding company. Through its subsidiary, BankUnited, National Association, it offers a full range of personal and business banking services through 62 banking centers in 12 counties in Florida and four banking centers in New York.

The Company’s lending products include small business loans, commercial real estate loans, equipment loans and leases, term loans, formula loans, municipal loans and leases, commercial lines of credit , letters of credit and consumer loans. Its deposit products include checking accounts, money market deposit accounts, savings accounts and certificates of deposit. The bank provides commercial and municipal equipment and franchise financing, using both loan and lease structures.

An overview of BankUnited’s balance sheet is shown below,

Miles Lewis of Royce Investment Partners commented on BankUnited in November 2021. At the time, the stock was trading around $40. It has gone down since then and is arguably now a better value. He said:

“One of the companies that we really like right now is a company called United Bank . They’re what we’re looking for in terms of what we like about a bank, which is they’re in the state of Florida, which is a very attractive growth market. This means there is population growth there, businesses being created, and it means opportunities for local, community and regional banks to make loans and collect deposits. They have a higher cost of funding than many of their peers, and because of that they have lower margins and lower returns on assets and equity. And we think they are improving their funding cost significantly over time. They have made a very conscientious effort to attract new customers, bringing with them their low-cost trading accounts and deposits, and over time, as that cost of funding goes down, margins will go up. The final reason we like BankUnited is because we believe that, given their scarcity value in Florida’s most attractive market, they’ll likely be a take-out candidate for a bigger bank at some point. .”

More recently,

chuck royce (Trades, Portfolio) noted when discussing his company’s high confidence holdings:

“Another area we are very interested in is banking. This was not historically something the business was strong in. But I was convinced, with the help of Miles Lewis, that properly screened banks can be an extraordinary opportunity. United Bank is a great example. It is located in Florida. They have a scale. These are the ones that other banks want to beat. And they are the ones that could potentially be taken over by other regional banks. They’re growing, they’ve got great management, they’ve got great capital allocation, they’re buying their own stocks, and they’re expanding into adjacent areas. Florida is experiencing population growth. It is very important in the banking world to really understand the underlying growth dynamics. And many banks have no growth momentum; they simply participate in the financial community. We’ve chosen to say, overall, that our banks will be in growth areas, and that’s a great example.”

BankUnited is trading close to its book value. The book value per share has been steadily increasing at around 8% per year and the price/earnings ratio is around 9.

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Other metrics that I consider relevant for banks, such as median return on equity and return on assets, also look good.

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Company

Running

Price

ROE % (10 years

Median)

ROE % (5 years

Median)

ROA %

ROA % (5 years

Median)

ROE %

P/E ratio

(TTM)

Shiller PE

Report

PB report

Growth of the book over 10 years

Rate (per share)

BKU

Bank United Inc.

$36.23

10.58

10:48

1.07

1.04

12:41 p.m.

8.46

10.76

1.06

8:20 am

Evaluation

I use a modified version of Graham’s number to rate banks. The formula I use is: fair value = (current stock price / Shiller PER ratio) * (8.5 + 1.5 * 5-year accounting growth rate (per share))

The first part of the formula (current stock price divided by Shiller’s PE ratio) yields normalized earnings per share.

The second part of the formula (8.5 + 1.5 * 5-year book growth rate (per share) provides the growth factor. The 8.5 represents the price-to-book ratio of a banking firm with no known no growth.Each percentage growth over the last five years is given a weight of 1.5 and added to 8.5.This gives us the growth factor, which is then multiplied by the normalized earnings per share that we have obtained in the first part of the formula Note: I use the five-year book value growth rate for banks instead of earnings growth because I find earnings growth can be erratic and growth The book value is more stable for banks and gives a better representation of growth.The fair value in this case is $62.43, which is much higher than the current price of $36.23. This is a large margin of safety.

The conventional Graham value is also quite good at $56.28. Conventional Graham Value is a conservative valuation approach that measures a stock’s fundamental value by considering the company’s earnings per share and tangible book value per share. It is calculated as Graham’s number = square root of 22.5 * trailing 12 month EPS * book value per share. The 22.5 is included in the formula as a general rule to account for Graham’s assumption that the price-to-earnings ratio should not exceed 15 and the price-to-book ratio should not exceed 1.5 for a stock undervalued. Graham’s number is the upper limit of the price range a defensive investor should pay for a stock. According to this theory, any stock price below Graham’s number is considered undervalued and therefore worth investing in. Currently, there is a 35% margin of safety even below Graham’s value.

The stock also looks undervalued on a price and five-year midpoint basis, pointing to a value above $40.

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On a price-earnings basis against similar regional banks, the stock also appears undervalued.

(USD in millions except fair price)
Market capitalization (USD million) Trailing P/E PER before
Bank United Inc 2963 7.7x 6.7x
Bancorp Investors Inc 3454 11x 10.2x
Texas Capital Bancshares Inc. 2731 12.3x 9.8x
Sterling Bancorp 5066 12.5x 11.5x
Wintrust Financial Corp. 4972 11.3x 9.5x
ETF Corp 3922 10.7x 8.7x
UMB financial company 4262 11.6x 11.3x
PacWest Bancorp 3226 5.6x 4.8x
Umpqua Holdings Corp. 3757 9.3x 8.8x
Ozk Bank 4580 8.1x 7.4x
Industry median 10.9x 9.2x
Profit after taxes 383
441 Net value 4160
4034 (/) Outstanding shares 82
82 Right price 51

49

Dividends and redemptions

While the dividend yield is mediocre at 2.6%, the bank is focused on share buybacks and has a three-year share buyback ratio of 4.8%. The dividend and redemptions generate an excellent shareholder return of 7.4%. I expect redemptions to continue as the stock is undervalued.

Dividend

Dividend yield (TTM) %

2.60

Dividend yield (forward) %

2.78

Dividend payout ratio

0.22

Dividend growth (5 years) %

1.90

Return on cost (5 years) %

2.86

Division continues. since

2015

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Conclusion

So why should you consider this stock?

While the US economy is expected to slow next year, South Florida’s economy is expected to remain strong. Florida has strong demographic tailwinds due to its warm climate and strong business prospects. The state is a major retirement destination for the wealthy and tourists. He is experiencing strong tailwinds of pent-up demand from Covid lockdowns which will continue as people prioritize their happiness. This should create solid business momentum for years to come.

BankUnited is also undervalued on a variety of metrics as noted above and is shareholder friendly with strong returns through dividends and buyouts. As Royce Investment Partners pointed out, BankUnited is also an attractive acquisition candidate for a large bank looking to expand into the attractive region. If that happens, it could quickly crystallize value. A redemption price, if it comes, could be in the range of $50.

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