Use access key #2 to skip to page content.
$3.81 0.55 (16.87%)
10/10/2008 4:00 PM

Sovereign Bancorp, Inc. (SOV)

CAPS Rating:
*

Holding company for Sovereign Bank, which is engaged in attracting deposits from its network of community branches located mainly throughout the New England states and originating commercial, consumer and residential loans.

View All Commentary (SOV)

Recs

5

Avatar NetscribeBanking (94.25) Submitted: 2/26/07 7:15 AM : Underperform Start Price: $26.17 SOV Score: 46.13

Sovereign Bancorp has its origins as a thrift institution but through a series of acquisition it has become more of a regional bank with a expertise in retail lending. Of late there is a strategic shift away from wholesale revenues with more emphasis on core commercial and consumer business to improve the quality of earnings on a sustained basis.

Though the performance for the recent quarter has not been satisfactory with net loss of $126 million and a deteriorating credit quality, it is entering the year 2007 with no acquisition or integration pending. It has a significant proportion of 27% as income from fee based sources and the accomplishment of massive balance sheet restructuring comes as a positive for the future performance, offsetting the current cost.

Net interest margins for the year 2006 declined 42 basis points to 2.75% mainly impacted by inverted yield curve as well as adverse mix of liabilities. Low cost sources of funding have been hard to come. Endorsing the same the average deposits declining by $645 million to $52.8 billion distributed between demand accounts with 13%, core accounts with 57% and the remaining 30% accounted by certificate of deposits.

A huge chunk of its loan portfolio, about 67% are in the real estate that are highly concentrated in the East Coast which have rumors of bubble or cooling down that would result in higher charge-off. The loss in mortgage banking has resulted in a shift of emphasis towards multi family loan business in 2007.

Corporate governance has taken a beating with the acquisition of Independence Community Bank Corp whereby it had to sell 19.8% of itself to Banco Santander Central Hispano to finance the same. The deal was structured in such a way to avoid shareholder vote it had to give up 3 of the 12 seats on board. As a result of this early indication of Sovereign Bancorp being taken over by Banco Santander Central Hispano looks visible.

However the future depends on its ability to rebuild its capital ratios with mounting debt it carries and realign its cost structure to bring it near to that of its peers. Moreover the fortunes of the bank are greatly tied to the economic conditions of interest rates, spending and consumer confidence, which is not good in the recent times and is on a down turn.

Report this Post Replies: 1 | Reply

Avatar NetscribeBanking (94.25) Submitted: 4/16/07 6:16 AM

Recs: 0 | Rec This

The bank experienced a challenging year in 2006 with net income of $136.9 million compared to $676.2 million in 2005. Flattening to inverted yield curve played a spoilsport leading to deteriorating credit quality. The restructuring and cost initiative program that would help it save around $80 million seems to be right on track. Endorsing the same it has terminated the services of 360 employees and expects another 400 through attrition by the third quarter of 2007. Moreover its decision to shed of approximately $10 billion of low yielding or high credit risk would help enhance its capital ratios and improve interest margins.

New ventures like remote image capture, remote check clearing and health savings accounts are the new avenues for mopping up low cost deposits. Traditionally the bank had its asset growth through a series of 27 acquisitions over the years taking a beating on its profitability – its return on assets and return on equity at 0.8% and 10.1% respectively considered very low when compared to its peers.

The June 2006 acquisition of Independence Community Bank Corp seems sensible with huge potential to tap the Metro New York area, which has the largest underserved Hispanic population. However it is the aftermath of financing the deal whereby it agreed to sell around 19.8% of itself to Banco Santander that caused stir by activist shareholders like Relational Investors. Even the issues of corporate governance seem to be at ease with the ouster of it long time CEO, Jay Sidhu.

Summarizing the above mentioned facts and Fed reluctant to drop interest rates further it is better to avoid the stock in 2007. However chances of Soverign being taken over look visible and seem the ultimate solution. Though there are certain clauses that would prevent Banco Santander from taking full control until 2008 there was new snippet stating that Sovereign’s Board might recommend shareholders vote in favor of opting out of anti takeover laws that would lift a 20% voting rights cap and clear the way for Banco Santander increasing its stake in the group.

Report this Post Reply

Featured Broker Partners