Yet Another Value Podcast - Tim Bergin from On Beyond Investing on Global Value Investing and the CIT merger

Episode Date: November 20, 2020

Tim Bergin is a value investor and the founder of On Beyond Investing (https://onbeyondinvesting.com/). In this episode, he discusses his background, why he sees value in the banking space and specifically in the First Citizen (FCNCA) / CIT merger, and how consolidation could drive upside in the Irish banking marketTim's Twitter: https://twitter.com/onbeyondinvestOn Beyond Investing: https://onbeyondinvesting.com/Chapters0:00 Intro1:35 Tim's Background (and cold water swimming)5:35 Tim's evolution from credit analyst to value investing8:50 Seeing value in financials and mining / commodity stocks17:40 How to spot uninvest-able bad banks27:55 Tim's Favorite Uranium Stocks30:05 First Citizen's (FCNCA) / CIT merger overview37:00 Synergies from the merger and why it's so accrettive44:00 Could a large bank spin off a high multiple fintech company?47:30 Overview of the Irish banking market and why consolidation could benefit investors

Hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have my friend Tim Bergen. Tim is the founder of On Beyond Investing. And it's a subscription service that explores kind of value and deep value ideas across the globe. Tim, how's it going? Good, good. It's a pleasure to be speaking with you, Andrew. I'm a big fan of your show. So it's cool to be part of it. No, I appreciate you coming on and, you know, let me start this podcast the way I do every podcast and that's by pitching my guest and that's you. You know, A, I was telling you before we signed up, I've been a subscriber on Beyond for since at least the summer of 2018. So, you know, I didn't sign up just to have you on the podcast or something. You know, it's a pay for service.

So if I've been subscribing for over two years, it's because I like it. But, you know, it's one of my favorite subscription services. In the world, it seems, is increasingly focused on, momentum, growth stocks, you know, especially U.S. focused. And on beyond, you know, it kind of cuts against the grain and does one thing. And that's looked for, for the most part, traditional value to deep value, good companies, kind of all across the world. So again, I've been subscribing for over two years at this point, really enjoy the service, really enjoy everything. My one complaint would be, I kind of think you're a crazy person because in your last episode, your last issue we talked about you go swimming in 10 degrees Celsius,

water a couple times a week. I think that's a little bit under 50 degrees Fahrenheit, which is just wildly cold. So you're a crazy person. But all that out the way, Tim, why don't you give us a little bit of your background and how you can start on beyond? Well, thanks. The cold water swim is pretty cool. I suggest people check it out, but do it slowly and safely. Anyway, so my gym, when we could go to gyms, they had a cold tub. And the cold tub would be, it's like 50 to 55 degree water. And you get in there for five to ten minutes after your workout to recover and like I could barely stay in there five to seven minutes and that would only come up to you know right underneath my heart level I can't believe you're going swimming in that it's just my I'm sure you can do it but

it's just crazy to me yeah the movement makes it easier the movement makes it easier uh yeah and it's open wide it's there's uh it's kind of the element of just calming yourself down and you know just kind of trust in the process it's a cool cool experience makes sense but uh I'm sure our listeners don't want to listen to us talking about swimming cold water. Why don't you give us some background? Yeah, they can check out our new cold water swimming podcast if they want to do that. So my background is I was studying math and university, specifically actuarial science. And at my university in Canada, the way it worked is like every four months, you would alternate between work and school. So towards the end of my school, I applied. I applied.

and got a job at a Canadian investment bank, an investment bank of a large Canadian bank in New York. And as part of that, they put me on a bank credit prop trading desk. And this is back in 2005, I think. The glory days. It was the glory days, exactly. It was the Wall Street Bank prop trading glory days. And so I stayed doing that for the next 11 years. And we were a global trading desk, you know, we had desks in all the major markets. And we're, I think, one of the bigger credit prop desks on the street. And over my 11 years there, I did a whole bunch of stuff. Like, I traded interest rates, traded convertible arb, did long short credit, you know, corporate bond versus CDS arbitrage, or what's not really right word, but whatever. That strategy, capital

structure arbitrage and that was a great seat like you said it was during the glory days and you know I was there 309 and kind of saw the implosion in the credit markets from a front row seat that was pretty cool I took a couple years off my life but it was fun moved up to Canada with the same bank around 2009 and then worked there for you know a bunch more years, went to two credit hedge funds. And then I just decided to quit to do my own thing. Yep. So for about the last five years, I just primarily been managing my own money. And as part of that, you know, people would approach me every once in a while, you know, friends and family saying, oh, you know, would you manage my money? And for various different reasons, I just wasn't that

interested at the time. But I said, you know, how about I just tell you what I'm doing? Like, you know, I don't want to give you advice, but I'll tell you what I'm doing, what I find interesting, what I'm looking at, you know, is that, that be something you're interested in? And that's kind of what on beyond investing is, has become. So primarily now my clients are, you know, people like yourself, small hedge fund managers, high net worth types. I originally thought it would be more retail focused, but they don't, you know, that just hasn't been who's found.

my stuff interesting. And I would like to think is, you know, it's still the same. I just write what I like and what I find interesting. That leads me to to various weird places. But yeah, that's kind of on beyond the best. That's great. Now, in your background there, I heard three times credit, right? Credit prop to us. And then I think he went to two different credit hedge funds. And that's a little surprising. You know, I knew a little bit about your background, But that's a little surprising because just when I think of all the issues of On Beyond and maybe it's just recency bias or I'm forgetting like most of them are kind of focused on good business, good solid business, stable, good outlook. You know, there's not really a lot of, hey, look at this bond or, you know, this is a quirky situation where I've looked through the loan docs and I think there's something a lot of investment. Like, how did you transition from credit to this kind of more value, value investment focus?

Well, I think there's kind of two ways of looking at that. So the first thing, a credit prop desk on Wall Street back in the day was kind of like a cheap funded way to buy credit. So it was kind of like almost an arbitrage, right? Like, you know, if you buy a corporate bond and hedge out the interest rate and credit risk and you can take out, you know, 1% per year, you know, that's not appealing to anybody unless you're a bank that can lever it and your cost of funds is zero. I can't tell you how many times I've heard merger R people in particular say like, oh, like there's some Japanese banks. They've got prop traders who borrow at zero percent cost of funding and they buy every safe merger RRB until the thing is priced at like a 2%

annualized return because they can make that work because their bank calls charges them zero for the funding. Yeah. And it's explicitly. basically back in the day, if you hedged your corporate bomb with the credit default swap, like you could lever that a hundred times back in the day because of the risk weighting was so low. But if you take a giant step back, there was ways to make that trade more interesting where you're actually buying options. Like, for example, if the bond, if the company decided to makeholder bond or if it was a convertible bond, if the company was bought, sometimes you could actually buy these super cheap options. So, like, you pick up a 1% spread that you fund super cheap, but if they get bought,

then all of a sudden you make a really great return. Like, that was kind of, I think. And so, you know, I don't think the way I look at the world has changed. It's just, you know, what I try to, I think part of the reason I left the credit is I just wanted to go where there's better opportunities. So if you were managing like a, you know, European credit desk or whatever, like you're looking at 1% yields, tiny credit spread. It's kind of like, what's the point? Like unless you've access to leverage, but then basically you're just selling options is my thing.

You're just selling call options. Yep. You're collecting the premium and hoping it doesn't blow up anytime soon. That never really interested me. So I think it's more just like applying more of a credit analytical approach. So it's a consistent, I guess, philosophy, but applied in different markets. Perfect. And then, you know, I think that, again, this might be some recency bias here.

And you certainly cover more than just these two. But I think, especially this year, a lot of your focus has been on one of two things, either financials, trading below tangible, especially trading, below tangible book, and I think we're going to talk about a couple of those later, or commodity and mining plays. And I don't mean you're out here saying, hey, let's go buy gold or let's go buy nickel or something. But a lot of them have been, hey, there's this really cheap optionality buying this uranium miner or this minor of X or something. So those are two very different areas, right? Like actually, I would say there aren't two more diametrically

opposed areas, right? Because for the most part, if somebody's buying a minor, they're saying the Fed is destroying the currency. Gold's going to $10,000. We got to buy the gold miners to get in. And if somebody's buying the financials, implicitly, they're almost trusting the stability of the system, right? So what's attracting you to the two of those? And how do you kind of bridge the attraction to the two of those? Well, I think it kind of goes back to a point you said earlier where I think you can break up the investment world, like taking a giant step back into two types of people. there's there's volatility sellers and volatility buyers and the sellers are basically people you know selling options whether they know it or not but they're making steady progress where but the payoff is like there could be a really bad event so you can make money kind of like

momentum you make study money steady money steady money and you know that's a nice positive reinforcement but you're taking like large tail risks and some people really like that and then there's, you know, volatility buyers where you don't mind paying a premium or taking short term near-term losses if you think you can make a really large payoff. And, you know, I think people are mostly kind of born one in one camp or the other or they're taught very earlier in the career. I think I just happen to be a vault buyer. And I'm not saying one strategy is better than the other, but that's just who I am. And so, uh, so, um, so, So then I'm just attracted to situations where I think there's a highly asymmetric payoff.

And in the case of uranium, which is pretty weird, it's just, it's just a situation where demand is going to exceed supply significantly, I think. And then the miners are so bombed out, super cheap. Like it's not. And so if I'm wrong, you know, it won't be the end of the world. some of these things trade almost near cash. But if I'm right, then, you know, there's a huge home run. And, you know, that's kind of how I, you know, it takes me to weird places. It takes me to oddball stocks or it takes me to, but sometimes it'll even take me to a tech

company or even charter, I think, foot fell under that example. Like charter, there was very little downside below 300 and you nailed it. And, you know, I would put that in the same camp of voles. sellers were involved buyers. And that was just highly asymmetric. Well, you know you're speaking my language anytime you're going to harder into it. Let me, I want to ask you what your favorite uranium. I want to ask you to give the listeners a free look and ask what your favorite uranium company is in a second. But let me push back on one thing because you said vol sellers and all buyers. And actually, what I kind of look at it is with the uranium, you're a ball buyer, right?

These are super cheap at this point. I mean, a lot of them, as you said, of trading your cash or something and you're buying, hey, I think uranium goes up a tad and I'm going to make a ton of money on these or like there's a lot of volatility optionality in them. Whereas a lot of times the way I look at financials, even if they're trading under book, you're a ball seller, right? Like you're betting that these assets are going to be stable enough for you to eventually realize kind of tangible book value. And there's not going to be, you know, a sit group or something like there, if they have, if something happens to their portfolio, it's never going to be where they have a screaming home run, right?

Because they're only going to get paid par on their loans. You're a ball seller because you're hoping, hey, I get par and these guys are going to realize par and eventually, like, I get paid out cost of tangible book. Does that make sense or do you think I'm thinking about that poorly? No, it does, but I would bifurcate it. So banks that trade under tangible book, I think fit under two categories. And I kind of briefly touched on this in my last issue. And there's banks that trade well below book that you just can't buy.

And that's your point, like where you're effectively betting on stability. And then there's banks that trade well under tangible book but are fixable. So like if you look at a Deutsche Bank, that deserves to trade at a massive discount. And I wouldn't touch them and I wouldn't advise anybody to. But if you look at the CIT, it traded well under book value. However, if you dug in and you did, your work, you realize that the reason it traded well under book and the reasons ROEs were depressed is because it had a huge cost of funding. So to the extent that they could upgrade to an investment

grade rating, that cost of funding would drop massively. So, you know, most banks fund somewhere between, you know, 20 basis points and call it 60 basis points. Yep. It's EIT funds at 160 basis points. So if you can see a path forward where that 160 converges to 60, you know, all of a sudden, I think that's back in the Vol buying camp to the extent that you could be comfortable that that's the reason it's depressed. It's not depressed because it actually could implode, although, you know, there's always some probability that a bank implodes. Yeah. Whereas, you know, there can be like super sick banks that, you know, need stability in order to continue. continue, like it breaks down between fixable and non-fixable.

So I'm glad you brought up the Deutsche Bank because I actually did have a question from your newsletter on the Deutsche Bank example, but let me ask you on the sit. So, you know, one of the things, and we'll get to sit group in a second, but just one of the things in general you said is, hey, they fund their loans at 160 basis points, right? And a lot of banks fund them, I mean, kind of at zero percent these days, right, with a zero percent interest rate, a Wells Fargo with their free deposits, basically, when they're not stealing their deposits or defrauding their customers. But you said, hey, if these guys can refi from 160 to 60, you know, they're going to make a lot more money just because their cost of

funding has gone down. And I definitely hear you on that. But at the same time, you know, I've looked at a lot of subprime lenders. And the subpride lenders, they're always borrowing, you know, the first thing I say when I look at them is I'm like, oh my gosh, like their cost of funding is 10% because no one wants to lend them and their book is super volatile and everything, right? And yeah, these guys would mint money if they could. if they could kind of borrow at Wells Fargo levels or even Cit Group's levels, right? Like they would mint money, but they can't because no one's going to lend them to because their books so volatile. So do you think like part of their cost of capital is actually like

their book's just a little more volatile? Or do you think the market was looking at their, the stability of their business wrong? Does that make sense? Yeah, no. Well, the reason for CIT is just legacy. So they filed for bankruptcy in 09. they got saddled with, so to take an even bigger step back, in 08, they were basically all on secure market funded. Yep. They filed for prepack bankruptcy in 2009, and they've over that time transitioned from, you know, 100% basically capital market debt funded to now it's like 10%. But that 10% funding still costs them, you know, 5%. yeah right so that's a lot of the difference there and so so there's part of it's just like they just

have this legacy debt they need to pay it down or refinance it and it became a bit of a circle because you know their unsecured debt was high yield and the reason it was high yield is because you know their earnings were low but their earnings are low is because they're unsecured debt yeah but to your point about the lending side. I think you definitely have to take a deep dive, but on the lending side, the CIT just is more niche opportunities. So, like, their spreads are more like, you know, they're getting 7% on their loans. So it's not the crazy subprime, but it's more smaller. So they do factoring. They do equipment financing. I think they have a lot of. You know, they do rail car leasing. Yeah. Let's save secret for a second because I do want to.

kind of focus on that merger in that situation in a second. And let me just ask you a couple more on the background. So you mentioned Deutsche Bank, right? And Deutsche Bank, to you has been an example of, hey, this is the type of bad bank where it trades below book value, trades below book value in Deutsche Bank's case for 12 years at this point. And you avoid them, right? And I think you directly said in your article, you avoid them because you can Google and see like this culture is awful, this company is awful. And then another thing you said was, hey, look at Wells Fargo versus J.P. Morgan, Both of them traded for a big premium. And Wells Fargo, it turns out their car showers is a disaster.

And today they trade for a fraction of book value, right? And J.P. Morgan still trades for a big premium because they're great, run bank. And you said, hey, like, this is why you don't buy the premium banks because you never know which ones Wells Fargo versus J.P. Morgan. And I guess my pushback to you would be, well, like, with the benefit of hindsight, it's pretty obvious Wells Fargo was a bad bank, right? But nobody could have told you this five years ago. how can you say kind of right now that there's something that is a bad bank that's

uninvestable does that make sense uh so i'm not you're saying right you're saying right now george bank is obviously a bad bank you can avoid it and then you said wells fargo and jp morgan you can't invest in good banks because it could be a bad bank right now right well's fargo has proven that it became bad but five years ago no one would have said wells fargo is a bad No one would have said Wells Fargo is a bad bank. So how can you say like just with Google, Googling things today, you can prove one is a bad bank or another. Like maybe the market is, Deutsche Banks kind of turn their culture around. Or maybe J.P. Morgan is actually a bad bank.

And five years from now, we'll look back and say it was a bad bank this whole time. Yeah. Okay. So, yeah, there's two things. So to go back to the good bank first good bank, so my point wasn't that like you should never pay a premium. My point is just it's really hard. Yeah. I think this goes for quality investing writ large.

Like, if you pay a premium for a good company and you're right, that's a great investment. My point is, it's just hard. Like, it's just hard to know, right? Yeah. And so, you know, Wells Fargo was an example. Everybody thought it was a premium bank. It turns out it wasn't. And then I guess I go on to say further that I think it's easier to determine between a bad bank and, yeah, between an investable bad bank.

bank and an uninvestable bad bank. And I think the easier thing there is just finding a situation that's fixable. Like, for example, if there's a bank and they ran into problems in, you know, one of their lending areas, then you'd say, okay, that's fixable, right? And if they fix that, or, you know, they have too many foreclosed homes on their balance sheet, you know, if they sell those in voodem in treasuries, I've seen examples like that, you're like, okay, all of a sudden their ROE approaches eight from their current level of two. It's like, okay, that's, that would be what I call a bad bank that's fixable. Ran into an issue, but it's fixable. If you look at something like Deutsche, it's just their main business is just is tough. Like being a bank in Germany

is super competitive, super low spreads. They tried to hold on as like, you know, last investment bank standing. It really didn't work. They've two. much capital tied up in their, you know, interest rate swap trading. And then if you look at like the money laundering and you look at the, you know, the missmarking book scandals and so on and so forth, you know, you can say, okay, there's there's an issue here. Yeah. So I guess I guess what I'm trying to say is choosing between quality companies can be difficult. You know, some people are probably very good at it. You know, I don't think I have quite have that skill. So therefore, I think, you know, you can buy a good company at a good price, but also you can

look at a cheaply trading bank and determine if it's fixable. I guess that's my point. So I think what you're saying is to you, an investable bank, undertangible book value is a bank that they have an asset problem or they have a cost of capital problem, but they don't have a cultural problem. The difference for you is a cultural problem where it's just going to consistently repeat over and over and over again. Am I kind of interpreting that correctly? Yeah, exactly. Like if you had a subpride bank, you know, and all they did was subprime lending or subprime auto lending or whatever, and you just say, well, you know, that's just not an area that I think is a very good business. Like those things habitually blow up.

Does new management change? So subprime agreed, but like, does new management change a bad bank becoming investable. You know, I think of Wells Fargo. They're on, what, their third CEO in the past couple years, or Deutsche Bank, they're bringing a new CEO every two years. It seems like Wells Fargo, like, they're not in bad businesses, right? Can that become an investable bank at some point? It probably can. It probably can. I haven't spent too much time on that. But if I think of some of the ones I've invested in, like CIT actually, they change CEOs a couple times and every time the change has been positive. I think it depends on the mandate. Like if they're, like for example, in Deutsche Bank, they came in and their CEOs would say, we're going to double

down on investment banking. It's like, no, nobody wants you to do that except for probably your executive chairman. But, you know, if they come in and they say, okay, we're going to cut costs and reduce risk, we're going to be, you know, reduce risk culture. You know, I think that can make sense. But yes, I think it has a lot to do with culture, I think. I realize it's a little bit of a niche discussion. And neither of us are Wells Fargo-esque asserts, right? So we're kind of talking. But Wells Fargo is just one, it stuck with me so much recently because, you know,

10 years ago, Buffett's out here saying, like, whenever I make an investment, I compare my cost of capital to just buying more Wells Fargo, right? And Wells Fargo is probably trading at 2x book value then. And then you fast forward, 13Fs came out two or three days ago. And Buffett's selling basically his entire stake in Wells Fargo. at 60 or 70% of tangible book value. And it's one where I look, A, how quickly kind of things can turn on that. But B, like, it does scream to me like when you're paying that premium, there is something

to that. You know, like there is some risk you're taking that you assess something as that good business in terms of the gold standard of investors has been doing that for decades. And he was kind of wrong. Yeah, yeah, yeah. And I think in my last issue, I go into why, like, I can totally understand, like, Wells Fargo with the highest fee income, fee income,

you know, huge margins and less risk. And so if you've less leverage, less risk, high returns, wow, that sounds great.

And I think that, I think what I was getting at with the Wells Fargo is it's kind of a cautionary tale, I think, for tech investors writ large. Yeah. Or quality investors writ large

where it's like, you know, you can spin these narratives about, you know, it's a great and they're going to take over X and do Y. And, you know,

it's always good to pay up for quality and it's like well yeah if you're right like that's you know if you pay up and and you're right then your returns can be enormous but if you pay up and you're wrong your returns can be a disaster and i guess what all i'm saying is it's tough like buffett got it wrong in wells fargo um and you know he's the greatest investor of all time uh and so you know if you went back five years, differentiating or seven years, differentiating between J.P. Morgan and Wells Fargo was not easy. You know, if you pick J.P. Morgan, you did very well, and you were right. They are probably the best U.S. Bank by far. And if you pick Wells Fargo, you were wrong, and figuring out you were wrong would have been difficult. Like, I wouldn't knock anybody who

made that mistake. That was a hard one to figure out. It reminds me of one of the first podcast I did with Bern Hobart where we talked about, hey, you know, which fans would you bet against, right? Like, right now, they all kind of seem undefeatable. Maybe Netflix, you could imagine it, but like nobody wants to bet against Facebook. Nobody wants to bet against Amazon. Nobody wants to bet against Apple. But history shows one of these guys is going to fail at some point. And when they do, unlike kind of a Wells Fargo where there's a lot of tangible assets behind that, you know, like when you buy Facebook, you're really buying that earnings power, right? And that earnings power can drop really, really fast if you get it wrong. Not that, not that I would bet against

Facebook, but history shows one of them probably does crack at some point, you know? Well, as you know, I'm skeptical of some of those companies. Like, not that I'd short them. But I think on the tech thing, I think people also, you know, there's a very specific path that the world went through where antitrust was just wrong. Like, what would Facebook be trading now if antitrust said, no, you can't buy Instagram? That's a good question. Right? Like, you know, people would be like, oh, it's a dying platform, older demographic, so on and so forth. And I think with some of these, like, winner take all bets people are making, I think they're implicitly saying, well, whatever my company X is going to be able to buy the Instagram of their industry. And I think the wins have totally changed on that.

You know, it's a good question of all of these companies. It's a great question, but at the same time, and again, neither of us. or tech extras, but like, when Facebook bought Instagram, people were mocking Facebook. You know, like Facebook bought Instagram for a billion dollars. They had 39 employees and no revenue, right? And if antitrust had stepped in and blocked that, like, who's going to buy what? Right? Like, there was no market there.

Like, no one can buy anyone if you're going to block that thing or no tech company at least can buy anyone if you're going to block that. So totally agree. I was one of those people who are like, wow, that seems crazy. But I guess I mean to say is like the next decade, won't be the same. Agreed. So the next decade, they won't be able to do the same thing.

But that's getting a lit out of my. I'm with you. I'm with you. I want to talk FCNCA, SCR group merger. But before we get there, real quickly, we mentioned uranium. Let's just give everybody quick. What's the one uranium that people should not invest in because we never make investment market conditions here, but the one that you think is the most interesting that people

should be spending some time researching. Oh, man. I guess in my last issue, I'll throw it too. So one, if you want to talk about like quality companies, there's one company in Kazakhstan that just dominates the market. 40% market share, lowest cost provider. You know, usually that means enormous premiums. They don't have it. And it's actually quite cheap.

So that's the easiest. And you know, what company is that? Kazatomprom. Casatom. that's just the easiest, safest, and it's cheap. Do they trade on a Kazakhstan exchange or a U.S. Exchange? No, they trade in London. And the sovereign wealth fund owns, I believe, 75%.

And, you know, they're market focused and, you know, they're starting to change from just, like, produce as much as you can to maximizing, you know, returns. And so if that works, it boosts the whole uranium market, and they should do quite well. And then there's an interesting company traded in Australia, but it's American called Peninsula Energy. It's kind of funny that they have a sales contract. Usually uranium sold on long-term contracts. So they have a long-term contract, even though they don't have an operating mine. And the contract struck at $52. dollars a pound and your random trains at 30.

So in the meantime, they can make that spread to help fund as they change their mind around. Longer discussion, but I think that's, you know, between the cash they have and between the value of that contract and, you know, if their new mine works, which I think it will, but I could be totally wrong. I think that's one of these asymmetric opportunities. Perfect, perfect. All right. So let's switch over and talk about, uh,

First Citizens and Cit Group. We've obviously already talked about the Cit Group a little bit, but these two announced the merger. I think it was exactly a month ago at this point. The market, part of it's the market just screaming higher, but part of it is the market loves this merger. You know, I think First Citizen stock is up like 40%ish since they announced the merger. So that's always pretty nice.

But why don't you take us through, you know, First Citizen was one of your recommendations this month. What do you like about First Citizens? What do you like about the merger? How did you approach this company? So First Citizen is kind of like, you know, if you or I saw an investor doing something really interesting, you're like, hmm, I'm going to pay attention to them. And, you know, and First Citizens buying CIT kind of made me say, oh, like I didn't really know the bank prior to the deal.

I actually always thought a Canadian bank would buy CIT. And so when they bought it, I just said, wow, that's somebody interesting. doing something smart, so I'm going to dive in. And so it's a bank based in North Carolina, mostly owned by a family who's run it for, I think, the last 100 and 100 years, very good returns, long-term, and really good return since their CEO took over, even 10% annualized since 07. And he's largely done this through acquisitions. Yep.

So, CIT will be their 21st. And acquisitions have been a really good strategy because you had, you know, banks trading well under tangible book, small, mostly ignored banks, they get cheap financing to purchase them and then fix it. So it's, you know, they would fall under, you know, good banks but subscale or good banks, but, you know, they have an issue that capital would solve. And so over that period, basically book values tripled, but they've also reduced. shares outstanding by 7%. And the reason the market really likes this deal is, you know, as we were saying before, CIT has a high cost of financing. First Citizen is a triple B plus rated bank. CIT is a high yield bank. This will all of a sudden boost CIT to an investment data entity. They can refinance their debt and

all of a sudden, that falls directly to the bottom line. And what really interests me about this deal, and I've invested in CIT on and off for, you know, last decade and lucky enough to own it when this deal was announced, is that, you know, before I looked at the presentation, I just started modeling out numbers myself, just to see, you know, I wanted to compare what I thought to what they were going to present.

And, you know, if you all of a sudden just said, okay, you know, reduced costs by 15% and reduced cost of funding over time and take into account that, you know, both have decent commercial real estate exposures and they'll probably see losses there, it was easy to see how this combination was going to look at an ROE of, you know, 12%. You know, somewhere between 10, 15, if you're super bullish, but 10 to 15%. And CIT was trading. at, you know, 64% of book and even the combined entity now, even though it's up 40% is trading at, you know, 92% of book. So you, so first citizen, you know, to kind of recap, 44% family owned, trading at 92% of book, assuming the deal goes through. And you're looking at ROEs of 10 to, you know, 15% depending on what losses they take on their commercial real estate. And, Yeah, hard to say what that's going to be, but that's a wide enough, positive enough ban for me to be interested. And, you know, they're only talking about cost savings of 9%, which seems pretty conservative to me.

So if you look at the track record, you look at everything like that, you look at how smart this deal is. Yeah, it seems really interesting. And to take a big step back, when interest rates are so low, there's really only, you know, to, things banks can do. They can cut costs and they can lower their financing costs. And you can do both by gaining scale. So to the extent you can massively increase scale, because these banks are very similar size. You can buy a bank that you can fix. CIT gives them much more niche, higher spread yielding areas of opportunity. It's just a really smart deal.

And I think it's applicable on a bigger scale. You know, as rates are zero, you know, and banks, you know, a lot of banks will have three times their equity in just marketable investments. Yep. You know, as those yield close to zero, you know, that used to provide them, you know, when rates are at 2%, you know, that's 6% of ROE. That 6% has gone to zero. So, you know, you have to do something like this in order to produce the, you know,

10% return on equity that the market wants. And this seemed like a really smart way for For Citizens to do it. And so, yeah, the day the deal was announced, I just bought for Citizen shares. There you go. Well, 40% on them in a month, not bad. Well, it felt dumb at the time because it was trading up 12% that morning. Yeah. But whatever.

I was like, I don't care. It's still super cheap. And then, yeah, and it's also good to be investing with people that seem to be doing interesting things. And I think this definitely falls under that category. No, it's funny because First Citizens, I've followed with First Citizens and sit kind of out the corner of my eye for a while. And it's funny that, you know, I don't think anyone ever mentions them, but they're this good. solid bank, as you said, they've grown through acquisitions. I think they've done a really good job. And like, you know, the morning they announced SIP Group and it's, hey, we're using

our stock, which trades at book or maybe a slight premium to book, definitely a premium to tangible book value to go buy SIP Group for, what, 60% of book value, something like that? I think it was even lower. I should have it here. I think actually they sold it below book, but it kind of didn't matter. Yeah, but they're buying, they're buying CIT at, yeah, 37% of book and they're selling stock at 84. Yeah. So we're doing this hugely a creative transaction. And by the way, like all of the, you know, everyone knows mergers, revenue synergies very difficult to get in mergers, right? But cost energies when you're doing a kind of, when you're doing a strategic merger, cost energies are certainly achievable, right? Especially for banks. Like there's a lot of these, a lot of these duplicative costs you don't need when you merge two banks together. So I, I, I think they're doing a deal that made a lot of sense, and they were doing that evaluation that make all the sense of the world. And you're the first person I really heard mentioned, like, hey, this is a really gosh darn good deal. And obviously it took the market a couple of days

to catch on, but the market started to catch on. They bought two banks that were at the kind of lower end of the efficiency ratio for banks and ROA for banks and stuff. And they're going to take them medium of the pack, maybe a little bit upper median of the pack. And I think it'll be a really interesting deal. Yeah, if you wanted to be super bullish and say, like, you know, there's a vaccine and, you know, CIT's losses are going to be pretty minimal. You know, we went through a liquidity event and perhaps not like a bankruptcy type event. You know, they're buying, even, you know, after their shares of rally, they're buying CIT at 64% of book, but CIT's ROI could be 18% with, you know, 50 basis point cost of funds. And that's not going to have.

happen overnight. But, you know, it'll happen in two, three years. So like, it could be a monstrous return for them. Yeah, buying something with an 18% R.A for 40% of book tends to work out pretty well. Yeah, exactly. And even if they only get 10%, like, you know, it's a pretty smart idea. And so investing alongside smart ideas usually works. A lot of CIT, a lot of their, their lending in their franchises, you mentioned some of them, but a lot of them are commercial business or in the commercial like i think they used to have a big uh franchise lending group they've i think they've got a lot of uh abel stuff and everything tell me if i'm wrong on any of this i think that's right yeah so but you know a lot of these places are areas that uh tech startups like a

square or something are are trying to figure out ways to move in do you worry that they're kind of getting get out competed by these tech startups and stuff that are moving in aggressively very cheap cost of capital because they're raising money at huge valuations. And they do kind of own that relationship, right? Like if I'm, I'm just thinking if I own 100 McDonald's and CIT comes to me and says, hey, let us loan you, you know, money at 4% for your next restaurant. I might say, no, I'm just going to go with Square or something because I do all my POS through them and they offer me the same thing. And it's just a lot easier to have it all wrapped into one. Does that make sense or am I missing something there. Yeah, definitely. And there's some, I think, healthy competition. I think whenever I've

looked at these, like, a good example is the peer-to-peer lending. Yeah. It really didn't work. Yeah. And the reason it really didn't work is, and I had some money in some of these platforms just to see what it was. And the reason it didn't work is kind of twofold. One, you need deposit funding, right? It's really a low-cost funding. Yep. Like, you can. You can, can't compete on spread if I can borrow at, you know, 40 basis points or lower. And maybe they have an equity, like a massive amount of equity now, but that's not always going to persist. And two, you need somebody to deal with defaults. And I think that's the thing that they always messed up. It was actually interesting. As I always think, like, a Goldman

should buy a peer-to-peer lender and then, you know, finance it with some of their, provide like some funding to the platform via their deposits but then also offer that to the retail clients and then say on the back end you know we'll try and maximize recovery yeah I always thought like a peer-to-beer lender should be like rather than you know just put your money in you know the the brokerage your bank offers yeah you could also put it into like a peer-to-peer offering that your bank services no I hear you and like again I hear you because lending club is obviously what everyone thinks of, right? And lending club's whole pitch was,

hey, we're going to be the platform to match people who wanted lend money to consumers with consumers who want to borrow money. It's like, that platform kind of does exist, right? Like there's the, you've got credit card debt out there. You can borrow against your credit card. Like, it's tough because what they're really just doing is giving people, they're matching the riskiest bars

you can't borrow anywhere else with the people who are willing to fund them the cheapest. It wasn't great. But when I look at something like this, like it does strike me as Square owns a customer relationship, like, they can do a lot of really good credit underwriting because they see the cash in, cash out every day, right? Like, they see the receipts and everything. So I do wonder if, like, the people who kind of own the customer relationship that directly have a little

bit of an edge there. Certainly, like, that's a good example. But then, you know, what about the guy who just owns his own burger restaurant? Yeah. Right. Like, and then, you know, maybe a CIT is, who sends in a loan officer that can appraise the property. Yeah. Like, they have an advantage over just, like, having the credit expertise. Like, not everything can be automated, I guess is what I'm trying to say. And so, yeah, there can be scale advantages that these tech providers can do when they, you know,

when they have the data that you suggest. But there's still tons of areas where that doesn't quite work. I actually do think there are a lot of these. you know, fintech technologies would actually be awesome within a bank. Yeah. And I think, you know, and this is kind of skipping head a little bit, but part of what I think we're seeing, and part of why I think banks are so interesting over the next decade is, you know, they've had to invest in tech massively over the last decade because it was really

one of their only functions to cut costs because they still have to, you know, for the most part, maintain their retail, retail branches. And as a result of that, I think they're embracing technology like they really didn't. They're super slow to adopt. And I think over, you know, specific last five years, I think that's changed. And I think you could see more efficient banks. Because imagine, like, if a bank can achieve an 8% ROE now or even, 10% with interest rates at zero and interest rates even go up to 2% for overnight,

like they're going to be supremely profitable. Yeah. And I think that's kind of what you're saying in terms of like, you know, there'd be more competition from fintechs, but I also think the banks will have massively benefited for these tech advances in their areas, at least the banks that are willing to take advantage of it. Especially, I think this would be for a larger bank than kind of first citizens, but for the largest banks, you know, I think I've heard.

Jamie Diamond say, like, we employ as many coders, as many software engineers as some of, probably not like a Google or Facebook, but the tech company's one rung behind them. They employ just as many software engineers as them, you know? And I do wonder, like, if you look at JPMorgan, you say, hey, I've got the Chase app on my phone, right? And you look at the valuation of J.P. Morgan gets versus the valuation, a square or one of these guys gets, you do have to wonder, like, is there a world where five years from now, they're spinning out their online startup or something and they can achieve a huge valuation because they certainly have the tech, they certainly own a lot of customer resources and relationships. And again, I'm just kind of

spilling here, but you could paint me like a super bullish future where there's these huge hidden assets inside. I think it'd be one level up for citizens, but where there's these huge assets inside of them. Well, or even, you know, to skip ahead, we're going to talk about Irish banks, but some of the ones I look at, you know, they talk about cutting costs 20 million, you know, 10% per year. But they're taking that those costs. and investing them right into tech. Yeah. So like, you know,

streamlining processes, apps, providing, you know, AI for loan approvals, so on and so forth. So I think, you know, a lot of these things will be best served in banks

because they do have the lowest cost funding. You know, there will be niche opportunities, but I'm highly skeptical, too, of, you know, more on the insurance side. We have, it will price everything better.

It's like, wow, the other industries have lasted pretty well for last 100 years. Like, I don't think that's right. Yeah. Look, if you look at the oldest businesses in the world, I believe most of them are attached to some type of insurer or bank, right? Like, those are, you think of something like a Bank of America. It dates back to, I think, Alexander Hamilton founded one of the forebearers of Bank of America. Like these banks often have roots that are 200.

300 years in the past. And there aren't a lot of businesses that do that. And sometimes when I look at these banks trading for below tangible book value, I say like, hey, you're kind of betting against the future of a business that, you know, we've got century, literally centuries of these guys exist and they can survive through some pretty trying times and a lot of technological revolution. Well, exactly. And the other thing to say there, too, is we are, this is like the only decade that's ever had negative interest rates in the last 5,000 years. yeah uh so you know and negative interest rates for the most part kind of breaks banks um so you know i think people see oh banks are are low you know because of tech and so on and so

forth i think it's just as simple as interest rates is much harder to make money um and so not only are you you know you betting against like you said the you know the hundred years of history suggesting that banks and insurance companies are are good solid industry but but you're also betting that the current interest rate environment will continue. And to the extent it does, then, yeah, actually the banks will, I think they'll be okay because, you know, they've learned to adapt to the last, you know, decade. But I think it's highly unlikely that will be the case. No, that's a good transition because it was Mark Rubenstein, his net interest, and he was a guest

on the podcast a couple months ago. He said, hey, you know, this is the first time I've ever seen. It was an Irish bank. I can't remember which one, but they were in liquidation, and they had to pay someone to take their deposits, right? And traditionally, you know, American banks, if you're an American bank investor, you would generally look at a company and say, hey, I value this bank at tangible book value plus a premium for their deposits based on how good their deposits are. And what this Irish bank was kind of saying was, hey, we're worth tangible book value less a negative premium for our deposits because of negative interest rates, right? So you do wonder, is that kind of adapting to the times and stuff? And I guess we can use that as a transition to kind of talk about your other idea in this issue, which was it was permanent TSB.

Is that it? Yeah, correct. The Irish bank. And we don't have a ton of time left, but maybe you could just quickly go through why you're so attracted to this Irish bank. Yeah. So I think the situation Mark was referring to was a French bank that was selling. Oh, I thought it was Irish. shoot, okay.

But then he did talk about an Irish bank in this latest issue, and this is what I touch on too. So I think that's probably where you got that from. But so permanent TSP super quickly trades at point one, two times book. And what's interesting is it's an earnings issue. It's not a solvency issue. They've elevated non-performing loans, but nothing crazy. you know, the reserving has proven to be really good over the past five, six years.

But the issues, they just don't make that much money. So there are a we as somewhere in the 2% range. And then obviously with COVID, they've taken provisions that will wipe out the next year or two of earnings, right? And so therefore, you trade at 0.1,2 times book. I think what people miss, though, and it's kind of like CIT, but the opposite, Permanent TSP has these tracker mortgages, and it's more than half of their loan book, and they float off the ECB rate.

So ECB rates minus 50 basis points, so these mortgages only yield 1.3%. In Ireland, which has the widest mortgage spreads in Europe, mortgages now are more like 2 and 3 quarter or 3%. So over time, those floating rate mortgages that are, you know, don't yield very much, will roll over and be converted into regular mortgages. So all of a sudden, on half of their loan book, you're picking up, you know, a 2% spread. How long will it take for them to roll over? I'm guessing, is it kind of decades for them to roll over? No, it won't be decades. It probably will be over the next 7 to 10 years.

Okay. And because these were all mortgages underwritten in, you know, call it 0607. So they're already, you know, 13 years old. Yep. So, like, it's just a matter of time. But what's really interesting is I think Ireland is one of the most attractive banking markets in Europe. It's an oligopoly. There's only basically five banks, two big ones, and then you've kind of three smaller. Why does mortgage spreads?

It's a long story, but they do. fastest-growing, youngest demographics, and I think the lowest, you know, debt to GDP. Yep. And business-friendly environment, you know, so on and so forth. It was really interesting. Everybody used to want to get over there for the tax rate over to Ireland. They still have the lowest tax rate in Europe by far. And what's really interesting is there's a bank, Ulster Bank, and they're owned by Nat West,

which, you know, rebranded from RBS, Roebanks, Scotland. And it's been an underperforming unit, you know, Nat West's ROEs are somewhere in the, I think, 6 to 8%. This Ulster Bank, it's called, has ROEs of, you know, somewhere between zero and minus one and positive one for the last three, four years. And it's similar issues where, you know, they have these low yielding tracker floating mortgages. And they also get, I think, probably stuffed unduly with some corporate costs. Yep. So if you look at permanent TSP trades at 0.1 times a book, the big Irish banks trade at 0.3. So I think NetWest is saying we want to wind down this Ulster Bank.

We're just going to go into liquidation, similar to what you were saying with the French bank. And I guess they're saying, well, we can, you know, if we sell off our loans, pay down our depositors, we can take out more cash than we would get, you know, via sale. But I don't think that's actually quite right. And I think, without getting too much into the weeds, if you look at the FCN-CIT deal and you model it into, you know, a permanent TSP buys Ulster Bank, all of a sudden you have a similar situation where these two banks with, you know, 2% ROEs, you know, in good times,

all of a sudden can be a 6% ROE, even a low interest rate environment because it allows two subscale banks, you know, to scale. Yep. And it consolidates the Irish bank into basically, it would be three banks plus, you know, KBC, which is kind of like Ulster Bank, just an underperforming, you know, subsidiary of KBC Bank. And then all of a sudden, the market share of this combined bank would be 26%. And there's just so many benefits from it. And what's interesting, too, is that Nat West has a ton of trap capital. So if they went the liquidation route, which I think would be a bad look for the Irish government, the Irish government could trap that capital for longer.

Whereas, you know, you can see a situation, and I've run some numbers where P, TTSB, you know, could pay up to 50% a book. Like just this massive, massive premium, Ulster Bank also has, you know, 26% CET1 ratio. So basically, they've doubled the capital they need. So if the Irish government regulators were willing to work with Nat West, they could say, okay, well, dividend out half the capital. PTSP pays you half. So all of a sudden, they'd be getting 75% a book for something that only does.

pays, you know, 2% are we at best. But under PTSB, you know, cost could be cut at least 20%. That's not just my number. That's, you know, some analysts as well. And then all of a sudden you have a really attractive bank in an oligopoly market. And the Irish government owns 75% of it. So I think they'd be highly motivated to help a deal like this go through, especially when, like, you know, Ulster Bank's a 120-year-old bank, you know, if they liquidate, they be leaving small towns with a bank.

Let me ask you two questions to this. So my first question is, like, you've said, hey, Permanent could pay up to 50% of book value for this company, right? And permanent, I think they trade for just over 10% of book value. Like, wouldn't shareholders revolt a little bit if they went out and said, hey, we're doing a deal? Were you just, you were just throwing that out there? You don't think they'd actually pay up that high? No, I think they could with cash. Okay.

Okay. And then the second thing, I just wanted to highlight, I thought you had towards the end of that write-up, you had, you know, I think the merger makes a lot of sense, right? Like, hey, you've got two underperforming banks. If you can take your RE up from 2 to 6 percent and you trade for 10 percent of book value, like that multiple gets interesting, really, really interesting, right? I think you had a really good comment. on why you think permanent

why a permanent merger might be in the cards. Could you just walk through kind of why you think an acquisition could be in the cards in the near term? Well, I don't know if it'd be in the near term because this is going to be like kind of like a political battle. The two big banks can't buy Ulster because all of a sudden their market share and commercial lending would go to 100% between the two of them.

PTSB is no. has no presence in the space. And I think it's just as simple as, you know, Nat West has $4.4 billion of euros worth the capital tied up in this thing that isn't making any money. And I think the Irish Bank would be highly motivated, like not to see liquidation. And so you could see a situation where

you can see a situation where, you know, they kind of say, hey, guys, well, we're just not going to let you do that. So why don't we come up with a plan where you can take out your capital sooner rather than later? You merge with PTSB. The government makes back all their money because I think the government's break-even price on the stock is somewhere near four euros. PTSD trades at 50 cents. Yeah. So, like, the government would be highly motivated. I think Nat West could realize the highest amount.

At the moment in the press, they're saying that it's much more likely liquidation, but I think it's one of those situations where you never believe something until it's officially denied type of deal. Yeah, I just, if I remember correctly, you said the permanent TSB was asked about mergers, and he said, hey, I've got a lot of experience in M&A from my Polish banking days. And I thought that that was one of those tells to me where it's a really nice check when there's a really accretive acquisition out there. And you ask about it and the guy says, oh, yeah, I've done acquisitions before. I know what I'm doing here. Am I misremembering that?

No, no, that's exactly right. That's exactly right. I think just the deal is like, you know, does Natwex think they can get more via liquidation? And would the Irish government be friendly if they tried to go down that path? Yeah. I think the answer to both is no. Um, but, but also like if I was making, if I was negotiating, uh, I think my opening salvo would be like, yeah, I'm going to liquidate.

So, um, so we'll see, but it, it seems highly cheap and it just points out that like, good things can happen when you have a solvent bank trading a point one time's book. That's fixable. Uh, good things can happen when you have M&A, uh, to build scale in the zero interest rate market. Um, you know, if it doesn't have, um, you know, if it doesn't happen. I'm still happy to hold permanent ESB. And I should disclose, I hold permanent TSP, I hold First Citizens, I hold Bank of Ireland. I just think it's one of those things. The market can get really focused in on the near-term financials and there's something. And you do see over and over, like it gets focused on this, but there appears to be a very

strategic deal that would create value for all sides. You know, the government would save face. They'd make money. Every player involved could make a lot of money, could cut a lot of cost. like keep a company alive is no small thing like it just seems like it makes all the sense in the world and financially it be super attractive. So those are the type of thing. I haven't looked at this in depth yet, but those are the type of things that I find betting on like can work out really well, you know? Yeah. And from a regulator point of view, you know, you're taking a bank that's struggling to earn a 2% ROE and all of a sudden of it owns a 6% ROI like it's significantly safer. Just like, you know, even if CIT does have issues in their in their CRE lending,

You know, as a part of for citizens, you know, that that tail risk of huge implosion just dramatically decreases. Like, if you've other businesses that are profitable, are continuing to bring in money, you know, it plugs a lot of holes. So building scale and diversification, you know, from a regulatory point of view, makes a ton of sense. I would point out that part of the reason this exists is like, you know, the Irish government owns 75%.

Yeah, so pretty thinly traded and a pretty big control. traded. Yeah. A shareholder who might not be super economic when it comes to their decisions. It comes to their decisions, but also, yeah, there's not a huge float out there. So, you know, it's, there's not a lot of people looking at it, basically, what I'm trying to say. Not too many people look at the third run Irish bank. I think it's interesting.

Perfect. I think it's pretty interesting as well. Cool. Well, Tim, anything else we should be talking about, Irish banks, First Citizen, anything else you want to throw out before we wrap this up? No, I guess the only thing I would say is I think there is opportunities in Europe in the United States for other transactions like this. And if anybody wants to send any examples my way, I'm happy to take a look. I'm currently looking for more.

Look, I agree with you. There's opportunities and I expect to have those opportunities coming once a month in my inbox through On Beyond Investing. So, Tim, thanks so much for coming on. I'll be sure to, you know, I've really enjoyed my subscription to On Beyond for over two years. I'll include a link to it in the show notes for anybody else who's interested in looking at it. You can always reach Tim at those at the site and we can go from there. So Tim, thanks again for him coming on and we'll have to do this again.

Awesome. Thanks so much, Andrew. Always pleasure to speaking.