Robertson Stephens Report on NTBK
NTBK: First it was E-brokerage, now it's Net.B@nking! Initiati...
June 9, 1999
N E T . B @ N K
First it was E-brokerage, now it's Net.B@nking! Initiating coverage
of the last standing, scalable Internet bank with a Buy rating and $50
price target
BancBoston Robertson Stephens BancBoston Robertson Stephens
Key Points:
** Net.B@nk's deposit and account growth have blown past all estimates to date,
while still maintaining an e-finance industry low $53.56 account acquisition
cost (1Q99). We expect the Internet bank to reach over 200,000 accounts by
year-end 2000.
** The company plans to expand its marketing initiatives and continue to build
brand in 1999 and 2000, extending its existing online relationships with
companies like Yahoo!, AOL, Infoseek, Lycos, and Excite.
** The Internet bank continues to supplement its financial portal by planning
to add in 3Q99 consumer, home equity, and automobile loans to its product
offering- Today, over 10% of its customers visit netbank.com everyday and
40% of its accounts are the "sticky" checking accounts.
** NTBK's asset portfolio consists of 75% adjustable rate loans and is slightly
positively "gapped", which should create a positive impact in a rising
interest rate environment.
** Net.B@nk assets, deposits, and accounts are all expected to grow over 100%
year-over-year. We are initiating coverage with a Buy rating and set a $50
six-month price target based on a 6 times price to book multiple.
Internet Banking Update
In the rapidly growing and evolving world of e-finance we saw the worlds of
brokerage and banking collide last week. With E*Trade's recent acquisition of
Telebanc for an estimated $1.8 billion, only Net.B@nk remains as a branchless,
pure Internet bank that can scale. The latest trend in the e-commerce world is
adding content. Amazon.com doesn't just sell the consumer books anymore, but
now will sell you music, videos, gifts, and even provides an auction. We think
as Internet powers or traditional financial institutions (late developing their
Internet strategy) look to further expand their product offering, an Internet
bank could be an excellent investment. For one, an Internet bank will provide a
steady flow of revenues and income from its assets and will not be transaction
sensitive or require eyeballs to generate advertising revenue. Secondly, we
strongly believe that consumers will feel most comfortable purchasing goods and
services wherever their bank resides. Thus, Internet banks will create the
coveted recurring Internet traffic, where eventually purchased goods will be
directly debited and credited out of a customer's account. Finally, Internet
banks offer the lowest cost, highest value financial products on the Internet,
creating a financial portal for all consumer needs. Listed below are some of
the key competitive advantages Net.B@nk encompasses where traditional and
smaller Internet banks fall short.
Value- Net.B@nk provides superior rates to its customers in Checking, Money
Market, and CD accounts. In addition, the company cross-sells additional high
saving financial products like brokerage, mortgages, etc. Traditional banks,
due to their brick and mortar structure, cannot pass through the savings to its
customers. Checking account rates are mostly under 1% in checking vs. NTBK's
3%-4% rates. Moreover, traditional banks will only cross-sell the consumer
their own loan and mortgage products. Over 10% of NTBK's customers (and rising)
visit netbank.com everyday. Thus, Internet traffic creates additional cross-
selling opportunities for the financial portal. The company now has 40% of its
customers opening the "sticky" checking accounts.
Scale- With last week's $87 million dollar equity and $100 million dollar
convertible debt offerings, NTBK will not be required to return to the market
to raise more capital until the company reaches over $7 billion in assets (as
of 3/31/99 NTBK reported $526 million in assets). In a highly regulated
industry, the OTS allows a bank to be leveraged up to 20 times equity. Today,
Net.B@nk stands at only 2.3x equity (converting the debt), giving the Internet
bank ample room for growth. Smaller Internet banks like Compubank and First
Interstate Bank of Indiana are only a couple million in deposits and cannot
scale quickly.
Build vs. Buy- If a company decided to build vs. buy, we estimate it would
take some 18 months just to open the doors (obtaining a charter, hiring banking
personnel, etc.). In the Internet world, like in dog years, time travels fast
and if a company waited 18 months to get a bank running, it could very well be
too late. Even if you did build, you couldn't scale. If you Buy, after the
acquisition of Telebanc by E*Trade, only Net.B@nk remains as a serious
acquisition candidate.
Brand- When consumers think of online brokerage, they think of E*Trade, not
Merrill Lynch. If consumers want to buy a book, they think Amazon.com, not
Barnes and Noble. If I'm a consumer, when I think of Internet banking, will I
think Wells Fargo or Net.B@nk? Net.B@nk has the clear brand name creating a
competitive advantage over its competitors.
Competition- As a result of traditional banks high operating costs, they cannot
provide the savings to the consumer that Net.B@nk can offer. Every new
traditional home-banking customer, almost instantly becomes a target for
Net.B@nk, for when the customer realizes the higher rates and lower cost that
an Internet bank can provide, they will make the switch right over the
boundless Internet. The rest of the Internet banks are too small in size to
compete on the same scale as Net.B@nk. NextCard has been mentioned as a
possible competitor, but the company still doesn't have a banking charter.
Furthermore, online brokers have been mentioned as possible competitors, but
they do not offer FDIC insurance, nor do they offer the superior saving rates.
Only Telebanc remains (with E*Trade) in this race to sweep up the Internet
accounts and deposits.
Growth
A key question for Net.B@nk has been trying to control the exploding growth.
The company estimated that it cost over $20 to open up a checking account in
operating costs. With the help of NCR, the company has completely automated the
application process taking out the paper-pushing and data entry costs. The
project is expected to be completed by the beginning of July 1999 and should
reduce the new application processing costs by at least 50%. Furthermore, the
company has addressed the immense volume of telephone calls by outsourcing
their call system to Customer Access out of North Carolina. The 125 seat call
center acts as a first line of defense for NTBK. Simple 1-2-3 questions are
answered by Customer Access Associates and more sophisticated questions are
passed on to NTBK personnel. Since the opening of the call center in May 1999,
Net.B@nk Customer Bank Associates have been at least three times more
productive.
Net.B@nk Key Metrics
1998A 1999E 2000E
Revenues $18.8 mil $54.2 mil $120.9 mil
EPS $0.07 $0.16 $0.30
Assets $526 mil $1.128 bil $2.340 bil
Deposits $284 mil $703 mil $1.857 bil
Marketing Dollars $1.4 mil $6.5 mil $12.0 mil
Accounts 17,408 66,000 200,000
Average Account Size
Checking- $4,000
Money Market- $12,000
CDs- $24,000
Loan Portfolio
As the fastest growing bank in the country, Net.B@nk is highly regulated by the
OTS. The company completed two Safety and Soundness reviews (March and August
1998) and most recently this past February finished a CRA Deposit and Loan
Compliance Review. As a result NTBK tends to be more conservative with its
asset portfolio than traditional banks, investing most of the recent proceeds
in adjustable "A" grade paper. The company's current interest rate sensitivity
"gap" is slightly positive, which means the bank would benefit in a rising
interest rate environment. The company monitors its portfolio with Sindero
Asset Management technology.
Net.B@nk originates and purchases loans predominately funded by its customer
deposits. The company maintains a loan mix of home mortgage home equity,
consumer and construction loans, keeping the credit quality high. A team of
seven, who all have significant experience in the loan business, manages the
portfolio. NTBK mostly purchases its loans (71.3% on 3/31/99) or acts as a
participating lender (22.3% on 3/31/99) to be most cost-effective. The company
originates (6.4% on 3/31/99) a small number of loans directly with its
customers.
In March 31, 1999 the loan portfolio consisted of
Residential Mortgages 40.2%
Construction 7.1%
Commercial 21.4%
Home Equity 28.5%
Auto 1.8%
Personal and Other 1.0%
Total 100%
Source: company reports.
The company manages its portfolio on a "gap" basis. The asset portfolio
contains mostly loans purchased from other originating institutions. NTBK has
concentrated on purchasing one to three-year adjustable rate mortgage loans,
home equity lines of credit, fixed residential mortgages and auto loans. Over
75% of the bank's loan portfolio are adjustable rate.
Products & Services
NTBK not only provides some of the highest rates in the country for checking,
money market and CD accounts, but also provides the consumer with high value,
low cost financial products. In addition, Net.B@nk doesn't charge the customer
for its services. For example, customers do not pay for bill pay and there is
not a minimum checking balance requirement.
** Deposit accounts- Some of the top rates nationally
NTBK Rates As of 6/7/99
Product Rate APY
Net Value Checking 3.05%
SuperValue Checking 4.00%
Money Market 5.13%
6-Month CD 5.35%
12-Month CD 5.50%
30- Month CD 5.75%
Source: company reports.
** Bill Payment Service- Through the help of Checkfree, customers pay bills
online through electronic funds transfer or a written draft sent to the
creditor- NTBK does not charge for this service.
** Overdraft Protection- Customers with interest checking accounts may apply
for overdraft protection online for amounts up to $5000.
** ATM Cards- Each customer automatically receives a free ATM card. The
operator of the ATM usually charges a fee.
** Mortgages- Net.B@nk enables customers to obtain interest rate quotes and
apply for mortgages online, acting as the loan originator. The mortgage
applications are processed and closed through mortgage.com. In addition,
NTBK has agreements with E-loan, Virtuallender.com and Fidelity Mortgage
Services where processed applications are sent to Net.B@nk to receive
funding.
** Credit Cards- NTBK offers customers Visa and MasterCard credit cards issued
by The Bankers Bank for no annual fee. The Bankers Bank carries the credit
card loans on their books and NTBK receives a percentage of the income.
** Securities Brokerage Services- Net.B@nk has a fee-sharing arrangement with
UVEST Investment Services, a discount broker, to purchase a full-line of
investment products.
** Business Equipment Leasing- With the Republic Leasing Company, NTBK allows
its customers to lease small business equipment. Lease amounts range from
$5,000 to $500,000 and cover virtually all types of business lines.
** Future products- will include automobile, consumer and home equity loans
that will begin in 3Q99. PNC will originate and service these loans on a
servicing released basis. Bill presentment and insurance products will follow.
Risks
Among the risks are the companies sensitivity to interest rates, deterioration
of the quality of the loan portfolio, outsourcing and the reliance on third
party vendors, possible government regulation of the Internet and Internet
banking, any Y2K compliance problems from NTBK's vendors, servicing its
exploding growth, and the acceptance and adoption of the Internet. |
