The Bancorp Stock: Fintech Solutions Push The Bank To New All-Time Highs (NASDAQ:TBBK)

The Bancorp (NASDAQ:TBBK) is heading for an all-time high and does not seem affected by the current macroeconomic environment. As expressed in my last article, this bank is not like the others, in fact it puts a lot of emphasis on the fintech segment. To some extent, we could almost call it a tech-bank, in fact its profitability ratios are quite high. At the same time, it does not issue dividends in order to reinvest capital in its business, which is not very typical for a bank.

In its diversity, TBBK is performing very well this year (+35% YTD) and is poised to record new all-time highs.

Highlights Q2 2024

TBBK’s quarterly report was positive in more ways than one: there was solid growth, profitability improved as well as business efficiency.

Revenues grew by 7% compared to Q2 2023, ROE and ROA reached 28% and 2.90%, respectively. In addition, the efficiency ratio improved again and reached 40%. This is an outstanding achievement, made possible by faster revenue growth than non-interest expenses. In this case it helped to take advantage of greater operating leverage through the fintech segment.

Over the years TBBK has surrounded itself with leading companies in the payments industry, and to date non-interest income is responsible for 22% of revenues. This is a very high figure and has implications not only in terms of earnings. In fact, fintech solutions tend to attract new stable and low-cost deposits.

A large proportion of deposits are derived from Fintech Solutions Group, and only a small proportion are time deposits and money market deposits. The average cost of deposits not surprisingly is very low, only 2.38%. Currently there are banks that are struggling much more and cannot get below 4%; TBBK has basically stabilized the average cost well below 3%. By the way, 93% of deposits are insured, thus below the $250,000 threshold. This is a sign of strong soundness for the deposit base because it implies high granularity and diversification of customers. In such a situation the bank presents a dominant position, since a small customer has no bargaining power and has to settle for lower interest on his account.

Being able to finance itself cheaply is a huge advantage for a bank because it can get a higher spread on its loans.

Compared to Q2 2024, total loans reached $5.60 billion, up 6.46% from last year. At first glance this may seem like an underwhelming result, but net interest income in the first half of 2024 reached $188.21 million, an increase of nearly 9% over last year. This means that the cost of deposits has increased more slowly than the yield on loans. In addition, the net interest margin this quarter reached 4.97%, up 14 basis points from Q2 2023: it is very rare to find a bank with a better result.

In all this, the only negative note is probably the increase in nonperforming assets to total assets. Last year this ratio was 0.47%, today 0.95%, basically double. This is not yet a worrisome level, but it should stop there.

In the first half of 2024 fintech solutions generated revenues of $55 million, up 10% from the previous year. The main drivers were an increase in transaction volume (up 13% from Q2 2024) and collaboration with new partners.

This business segment is growing in double digits and potentially has ample profitability as it is scalable.

Management’s long-term plan is for TBBK to become a kind of tech-bank. The core business will always remain lending money, but fintech will play such an important role that it will disrupt the financial results. From a long-term perspective, TBBK could have an ROE above 40%, an ROA above 4%, and an efficiency ratio below 40%.

As much as these targets seem too optimistic at the moment, management is actually slowly moving closer and the market is increasingly buying into their vision. Should it succeed, I doubt that many other banks can compete in terms of profitability.

TBBK’s EPS looks more like that of a tech company rather than a bank, but then again that is why this bank is trading at 3.37x TBV per share.

I personally find the current valuation too high, which is why I consider TBBK a hold. However, I do not doubt that this bank deserves to trade at higher multiples. The fintech segment is growing in double digits and has ample room for improvement in terms of profitability, so it would not be fair to price TBBK as if it were a traditional bank. At a Price/TBV per share of 2x it may prove to be a reasonable choice, and just a few months ago it was at those prices.

Conclusion

TBBK is a very solid bank that is growing fast because of its exposure to the payments market. This bank is not like other banks; it has traits of a tech company.

Looking at Capital Ratios we notice one more difference with traditional banks, namely a total risk-based capital ratio at 16%, which is very high and conservative despite the fact that it used to do a lot of buyback.

From the end of 2021 to the present, shares outstanding have decreased by 11.25%, a significant and unusual amount for a bank. Consider that the buyback leads to a decrease in equity, a crucial factor in the valuation of any bank. Therefore, to buy back so many shares, management must be firmly convinced about the bank’s financial position and ability to increase TBV per share.

In Q1 2024 treasury shares worth $50 million were purchased, in Q2 $100 million. In Q3 and Q4 another $50 million will be allocated each quarter.

So far management has been right, in fact TBV per share has grown year after year. Even the rapid rise in interest rates has not worried the soundness of this bank since unrealized losses are negligible.

From a certain point of view, one of the advantages of this bank is that it does not issue a dividend. While for some this may be a disincentive to invest in it, for others it is not at all since they can take full advantage of compound interest. Profits that are not distributed are kept within the company, thereby increasing equity. At the same time, a portion can be reinvested to enhance future revenue growth. In addition, buyback compared to dividends is a more tax-efficient way to remunerate shareholders.

In short, for those who want to invest in TBBK should keep in mind that this bank is managed differently from a traditional one, but these differences are the reason why it is almost trading at an all-time high today: many other peers have not even recovered from the collapse triggered by SVB’s bankruptcy. Of course, the opposite argument also applies, which is that it can crash more than a traditional bank if fintech solutions stop their growth. After all, when a company uses operating leverage, it can experience severe difficulties in downturns.