Street Talk Episode 75

Banks should not fall victim to focusing on short-term results and should instead work to deliver long-term shareholder value, particularly in a world increasingly focused on ESG, according to a veteran of the investment community.

Fred Cannon, former director of research and head of equity strategy at Stifel Financial Corp. unit Keefe Bruyette & Woods Inc., offered his advice on the latest Street Talk podcast on how banks can best communicate with investors. Cannon recently decided to retire after a career on the Street. He will soon join the FASB board and could serve as a voice representing the banking industry, which some bankers felt was missing in years past. Cannon's career includes stints as head of investor relations for California banks, including San Francisco-based Bank of America — which eventually merged with NationsBank to become Bank of America Corp. — and with Golden State Bancorp Inc., before he went on to join the sell side.

He said in the episode that the highest-quality companies he has encountered during his career focus on "really long-term" shareholder value, even if analysts are not happy with them in the short-term due to an issue such as expenses in a particular quarter.

"I think of two of the bank franchises that have done tremendously in building shareholder value in my tenure — [SVB Financial Group] and [First Republic Bank] — both have been very focused on long-term values, very focused on their customers, very focused on their employees," Cannon said in the episode. "I think that's especially important today with the increased focus on ESG, which, as you know, there's more money flowing into ESG. I actually believe that a focus on building long-term shareholder value is very consistent with having high scores on some of these ESG metrics because the management teams that are focused on long-term shareholder value really do have a focus on the governance of their company, the social aspects of their company and what they're doing in the environment."

Cannon said bank management teams should communicate broadly, and that includes talking to investors who might short the stock. Some banks are hesitant to meet with those investors, but Cannon believes avoiding skeptics is a mistake.

"Open communication is really important. Address your skeptics, address them honestly and agree to disagree and then move on. Because the fact is if you don't talk to them, there's a lot of chatter going on," Cannon said.

He suggested that banks should deliver a consistent story and noted that smaller and mid-caps banks should avoid complexity. He said larger institutions can have more complex stories because bank investors must form a view of the nation's largest institutions whether they own them or not. But investors can ignore smaller companies with a more complex story since they are less likely to represent a large position for any shareholder and would not heavily influence the competitive landscape.

Narratives play a large role in driving valuations in the current environment, Cannon said. Once a narrative set in, dollars move quickly thereafter due to the rise of passive investing. He said the narrative for banks since September 2020 has been quite positive, marked by reflation and support from continued fiscal stimulus. That stands in stark contrast to the negative view of the banking sector in the summer of 2020, when many investors believed banks could not make money due to low-interest rates and rising competition from the fintech space.

"Neither narrative is completely accurate, as anybody in the business knows," Cannon said. "Things weren't anywhere near that bad back in August. We've already seen some of the worst issues of the pandemic abate and we've already seen massive fiscal spending start to come in. And conversely, today, a bond yield of 1.5% doesn't mean an all-clear and net interest margins are going to rise significantly."

Cannon was also skeptical of the belief held by some that fintechs will massively disrupt traditional banks. He compared competition from fintechs to what has transpired in the computer hardware sector, where startups create new products and then the large incumbents adapt and integrate the new development into their operations. He said investors simply need to identify banks that are willing and ready to adjust to changes in the marketplace.

"I think one of the things in the narrative out there today is that what's happened in consumer is going to happen in small business, and all that's going to go to the large banks and fintech. Honestly, I've been hearing that since I was in this business in the 1980s," Cannon said. "I don't want to dismiss it, but it hasn't happened yet. So I think that there's still a niche."