Business improvements
Interview: Sovereign Bancorp---Sidhu, Jay---Chief Executive Officer
>> welcome back. we are talking banks. sovereign bancorp is pennsylvania’s second largest bank company. it reported its earnings for the second quarter after today’s market close.the company reported earnings per share of 37 cents beating the analysts’ estimates of 35 cents. joining us is the president of sovereign bancorp joining us live from philadelphia. give us a sense of the quarter just passed. did you see improvement in the business and the business of your customers.
>> we saw improvements. we beat street estimates by two cents and our earnings were up by 16% earnings per share. in the business lending area we saw 11% growth in our commercial loans, we saw 17% growth in our consumer loans. just in the past quarter we saw a $1 billion increase in our consumer deposits. overall business activity seems to be picking up. i think that’s reflecting in earnings per share growth at sovereign.
>> expand if you will on the extent of the business loans that you are putting out there. are you getting a sense that more businesses are coming to you to save themselves in a downturn or to grow for the future?
>> i think businesses when they be with a bank, they are talking about borrowing money for investment in the future. so i think the business loan growth in a good economy for a company like ours would be double digit. and we are in the low double digits, so economy is definitely in our assessment getting better but getting better at a pretty slow pace. i think if this trend continues we will see the second half of the year probably showing somewhere between $2.5% to $3.5% growth rate, nothing to write home about, but it’s better than the 1.4% growth we experienced in the first couple months this year.
>> when do you expect to see a true turn around when things will really accelerate in the economy?
>> i think we are seeing the trends right now. we are seeing signs right now. i think once we experience perhaps a 2.5% growth rate in the third quarter, there will be no question in my mind that unless there is a catastrophe somewhere in the world, that you are going to start to see a baseline or a base set up for somewhere between 3% to 4% growth next year.
>> we are seeing a chart of your operating income over the last several years. your balance sheet has been steadily improving over the last couple. did you put on any leverage in the quarter for reinvestment in the short-term?
>> not really, lane. what we were trying to do was to really have a fortress balance sheet. really improve our capital ratios.
>> we saw our equity go up by 73 basis points, more than a 20% growth in our tangible common equity issue. our tangible common is close to 4.5%. our focus is to stay with superior quality of our assets, a fortress type much stronger balance sheet. i envision adding somewhere between 30 to 50 basis points to our capital over the next couple months and still meet or beat the street consensus estimates. our street estimates for next year are $1.63 for us, i believe. and if you look at banks trading at 1 times earnings, that means we could possibly have a stock price, assuming we meet our street estimates, of somewhere between $18 to $20. the stock right now is trading at $16 and change. you announced the acquisition of first essex bank in june. you are going to close on that in not too much time. what are your intents for acquisitions? are you looking to buy more or are you building yourself up for a sale here?
>> we are building to enhance shareholder value. shareholder value can be expanded both ways, one is blocking and tacking, and execution. when we look at an acquisition it must be accretive to our earnings within a quarter or two maximum one year. in our case it also must be accretive to our capital also in a maximum of one year. first essex met those two criteria. it met a thirds criteria, it was in our most attractive market which is northwest of boston into new hampshire. so we will look for further acquisitions if they meet the same three criteria. as far as putting the bank up for sale, the question you asked me, if somebody is willing to pay us the price which we in our assessment shareholders would be absolutely winners, we’ll listen. but --
>> what would be that assessment? right now you are fairly cheap against your rs, trading at about 10 times next year’s earnings. others in your neighborhood are looking at 13 to 14 times. you may be very attractive just on that. what kind of value would you have to get out of a deal like that?
>> i think that’s a pretty hypothetical question, but we are looking at $1.60, to $1.65 as our street consensus estimate for next year. we’ve set our own goal that we are going to be striving for, assuming the economy improves, assuming we can see a margin expansion because rates are higher, and assuming we can see a reduction of credit costs because the economy is better, and under those circumstances we might get close to $2 in cash earnings per share in 2005. if that happens, you apply your 13 or 12 multiple, you might be looking at a stock in the mid to high 20’s. now, that’s something which we can control. and we are focusing on that. if somebody else comes in and shows us that they can give us a whole lot better than that, we are going to listen.
>> thank you very much. jay sidhu, chairman and c.e.o.of sovereign bancorp. appreciate your time. scholastic broke records last month with the fifth release of the harry potter book. yet the publisher’s latest earnings didn’t seem to be touched with the same potter magic.
