Trends Watch: Small-Cap Banks

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Mike Shafir, Partner/Portfolio Manager, Clover Partners.

What is your outlook for investing in small-cap banks?

I am increasingly positive on bank space as a whole. Because of the unique circumstances you had around both COVID-19 and the change in accounting standards with respect to loan loss accounting, you essentially had a backdrop where banks prepared for the worse. The CARES Act fostered a unique scenario for banks to build loan loss reserves while working with borrowers; more than a year after the initial COVID scare, lending has started to increase again. In addition, the world has learned to work with COVID-19 and companies have been needing credit facilities to continue to grow.

Furthermore, whether or not you agree with the Fed Reserve policy, inflation will be here for a while in our opinion. With the Fed initiating its bond tapering program, the natural conversation goes to when interest rates will be raised -- and ultimately, banks benefit from a rise in short-term rates. From a credit perspective, the industry is well-capitalized and well-reserved for potential losses. Finally, earnings will continue to move higher in the sector as excess liquidity gets deployed into a higher rate environment.

Where do you see the greatest opportunities and why?

There are a couple of areas that present the greatest opportunities. First, smaller banking institutions making a foray into technology, which would help drive loan growth in unique verticals. In addition, the consolidation theme in the banking space should help drive returns. Smaller companies in the $1.5-4 billion asset range are very good fits for M&A opportunities. With turmoil in the marketplace, aging CEOs and the costs of technology upgrades, we believe M&A will be a driver of outsized returns. Finally, companies that have lots of liquidity on their balance sheets that will be deployed to higher rates.

What about the greatest challenges you face and why?

What we are going through as we speak: Initially, with President Biden re-nominating Jerome Powell as the Federal Reserve chair, the Fed taper and a potential for two rate hikes in 2022, things were looking promising. But now with a new COVID-19 variant, the market turned upside down, which was hard to anticipate.

We expect the next two years to be good years, but near-term, there will be some volatility related to what we learn about the new COVID-19 variant.

What keeps you up at night?  

Interest rates, Federal Reserve policy and COVID-19 variants. Banks shouldn’t trade the same way as they did when COVID-19 started. With every variant, there is a new variable into the equation about portfolio structure. Ultimately my job is a mosaic theory of different variables and what will ultimately result in the best returns.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.