Sterling Bank CorpSwarovski Bank Corp.
Swamp Bancorp: Fusion with Astoria is a game changer - Sterling Bancorp (NYSE:STL)
Discretionary Sterling Bancorp (NYSE:STL) is a local bank primarily active in Greater New York City and the Hudson Valley area. Sterling Bancorp announces the closing of the Astoria Financial alliance in October 2017. For a long while Astoria has been an appealing destination for New York City' s banking community.
The New York Community Bancorp (NYSE:NYCB) was unable to finalize its acquisition of Astoria in December 2016, which we believe would have been a prime complement to NYCB's strategy as the bank has been facing financing problems for several years. Astoria found a business ally in Sterling and after a few month of negotiation, the parties released the long-awaited take.
Astoria Financial was a pre-merger on Long Island. While it had concentrated on business lending since 2010, private mortgage lending accounted for 52% of the company's entire lending portfolio. Conversely, Sterling's legacies were largely concentrated on C&I and CRE credit. Astoria Financial thus had a greater proportion of fixed-interest debt.
As a result of the combination, the carrying value of property, plant and equipment increased by +12% and the result by +9% and +16, respectively, in 2018 and 2019. But to be honest, Astoria Financial is something of a disputed advantage. Astoria's legacies had a ROE of only 4.2%, one of the smallest ratios among the comparative groups.
Some of the causes why the old Astoria had low return figures are bad operational efficiencies and low returns, most of which consist of hard loans. Before the transaction, Astoria had a cost/income relationship of 72%, well above the comparative averages. Interest on loans averaged 3.50%, which is also below market rates in comparison with most of the other local bank.
Sterling's senior managers are acutely conscious of the challenges. The main focus of the programme, as outlined below, is on reducing costs and realigning the credit portfolios. It is important that the benefits from the re-positioning of Astoria's old portfolios, on the basis of management's commentary on the latest results survey, are better than originally foreseen.
Lastly, we began the transformation of Astoria's credit portfolios by making a significant investments in our corporate finance and other businesses. We are expecting a significant increase in credit and deposits output when the banks start their work in 2018. The Astoria transaction and the measures described above are expected to generate additional pre-tax income of approximately $250 million over the next two years.
It is the re-positioning of you know that lower income asset that we inherit from you know from the Astoria side. So if you are factoring in the realignment we are going to do in the transfer that it is going to be happening in the credit book even without rates increases where you are just looking at today's new issue proceeds for the various businesses where we are in, to the point that the transfer is a success in re-positioning this credit book, you would get to a place where we would retain NIM and maybe raise it from a nuclear prospect, even if there are no rates increases.
Undoubtedly the most appealing part of the Astoria deductible is the favourable basis for your inpayments. Firstly, as shown below, the bank has a powerful presence in Long Island. As a result of the combination, a top 6 bank will be created in the New York area, on the basis of the overall capital contributions. Secondly, Astoria's overall investment costs have fallen 126bps to 0.29% since 2010.
The most important thing is that the pre-merger Astoria had one of the smallest deposits among his competitors. A rapid refresh is the measurement of a bank's interest changes on deposits in relation to changes in CIR. In view of the continued Fed streamlining cycles, short-term interest Rates will increase further, US banks' investment bets will be critical as it is likely to have the greatest effect on their overdrafts.
Astoria currently has a 8% bet, according to Sterling senior managers. By way of illustration: Prior to the transaction, Sterling had a down payment of 30%, while New York Community Bancorp, one of its major rivals in the New York metropolitan area, had a betas of around 27%. Astoria's overall investment costs have risen by 4 bps since the beginning of the year, equivalent to a mere 8% BET.
Third ly, Astoria had a greater proportion of CD's and saving accounts, which represent a more solid fund. Lastly, the combination is anticipated to have a loan-to-deposit relationship below 100%, which is another benefit in an increasingly volatile interest marketplace. Although the combination, as shown below, is diluted due to the lower earnings of Astoria to Sterlings NIM, it will create a very robust retail business well placed for higher interest at the shorter end of the interest line.
In summary, both Astoria and Sterling were poorly placed for a higher interest rates before the transaction. The Astoria loan to bond ratios were 117%, low-interest asset balances mainly made up of fixed-interest debt, while the old pound sterling struggled from an inexpensive financing basis with a higher bet pool. This makes the combination a turning point for both parties.
Sterling Bancorp has a proven history of growth through growth through a number of successful underwriters. The group, then known as Provident New York Bancorp, purchased Gotham Bank of New York in 2012. Provident New York Bancorp and Sterling Bancorp joined forces in 2013. Sterling finalized the Hudson Valley Bancorp transaction in 2015.
In addition, the firm has executed several smaller M&A transactions, among them the acquisition of portfolios. Fundamentally, Sterling Bancorp is one of the most powerful of its competitors. Sterling Bancorp, however, has the best ratios in the industry on a RoA and RoTE and RoA-base. It is important that Sterling will achieve the highest EPS increase in 2018. Sterling Bancorp is certainly not a share for income-oriented shareholders with a 1.5% return on dividends.
Before the transaction, both Astoria and Sterling were poorly placed for an interest rates hike. The Astoria loan to bond ratios were 117%, low-interest asset balances mainly made up of fixed-interest debt, while the old pound sterling struggled from an inexpensive financing basis with a higher bet pool. We therefore see the transaction as a kind of turning point for the merged group.
As a result of the transaction, Sterling Bancorp is on track for a strong excess with an appealing financing portfolio, a RED of 15+% and leadership in the New York area.