To: Mark[ox5] (0 )
From: Mark[ox5] Monday, Apr 5 1999 12:11PM ET
Reply # of 742
NTBK and TBFC article....
moneycentral.msn.com
Sectors & Trends
Virtual bank stocks climb in the online frontier
With stock prices jumping 125% in a quarter and with growth rates of 70%, this could be the year
for e-bank stocks. Blazing the trail are Telebank, Net.Bank and Security First.
By Michael Parrish
Smart new banks are on the scene, and more are on the way.
We're not talking about the latest mega-mergers, but the frisky, flexible, low-overhead, virtual banks
staking their claims on the Internet frontier. These are banks that Gary R. Craft, a senior
BancBoston Robertson Stephens electronic-commerce analyst, compares to the "wildcat" banks
that popped up in the 1830s, as America expanded into the West. Regulated these days by the
same rules that control other banks -- and with federally insured deposits -- these new virtual
institutions aren't wild in their business practices but in their boisterous stock-price growth, jumping
as much as 125% in just the past three months. As many see it, 1999 should be virtual banking's
breakout year.
Alas for investors, Security First Network Bank, the Internet pioneer, is no longer a pure play, having
been bought last year by "the Royal" -- Royal Bank of Canada (RY). Still, the banking-software half
of that business, Security First Technologies (SONE), remains independent, and like companies
that prospered selling blue jeans and gold pans to Western miners, Security First's prospects are
attractive in their own right. It has both virtual and traditional customers lining up for its wares.
As for the publicly traded virtual banks themselves, the two big guns now in operation are TeleBanc
Financial (TBFC), parent of the Telebank online bank, and Net.Bank (NTBK). Houston-based
NextCard, which is expanding its services from an online credit-card base, has also recently
announced an initial public offering (IPO) sometime this spring (proposed ticker: NXCD). The lead
underwriter is Morgan Stanley Dean Witter & Co. No date or expected price per share has been
announced. Another Houston-based private Internet bank, Compubank, is widely viewed as a likely
IPO candidate somewhere down the road. And with the juggernaut growth of the Internet, bank
experts expect more start-ups soon.
Smarter, richer customers
What's the lure? The growing online population promises Internet bankers a supply of new
customers through a new distribution channel without geographical boundaries. A recent report from
Legg Mason Wood Walker cited increasingly savvy financial customers with less time to do their
banking as the source of a surge in online transactions that it predicts will grow even faster than the
ATM craze. While ATM use is expected to continue to grow 13.3% through 2000, Legg Mason sees
a powerful 31.5% growth in online bank accounts through 2003, when they will comprise at least
one-fifth of all retail accounts.
"And banks look for growth, first and foremost," notes Christopher T. Kelley, bank analyst at Morgan
Keegan & Co. "You'll see a lot of people giving this a try." Craft and others agree. With this new way
to get into the bank business, Craft expects "lots of folks to begin eyeing this exciting market."
The growing online
population promises
Internet bankers a
supply of new
customers through a
new distribution
channel without
geographical
boundaries.
These folks, however, aren't likely to include existing conventional banks -- at least not right away.
Some big banks, such as Wells Fargo (WFC) and Citigroup (C), have mounted online operations.
Yahoo! (YHOO) has formed an alliance with Bank One (ONE). But most big banks see little
advantage in cannibalizing their existing customers -- and paying for it, to boot.
"Taking people who are in checking accounts getting 1%, and moving them into an Internet account
paying 3% -- they're understandably not terribly eager to do that," observes Sean J. Ryan, a banking
analyst at Bear Stearns. Until virtual banking is a much bigger slice of the banking pie, says Ryan,
the big banks "are likely to remain asleep at the switch."
But for the new virtual bankers, the equation looks different. Every customer is new to them. And
with their savings from lower overhead, they can attract Internet-smart investors hunting for a better
deal. Virtual banks offer lower loan rates and higher-than-industry rates on checking accounts,
money-market funds, CDs and other products.
Compare these online rates with the national industry average:
Savings Instrument
Net.Bank
Telebank
Industry average
Checking
3% to 3.95%
3.1% to 4.35%
1.22%
Money Market Checking
5%
2.47% to 4.78%
2.2%
1-Year CD
5.29%
5.16%
4.28%
Sources: Telebank, Net.Bank, Bank Rate Monitor.
Higher rates and fast online service have brought a better-educated, more affluent clientele to the
virtual banks. This gives the virtual bankers several advantages. By some estimates, for instance,
they manage an average account balance two to three times that of the brick-and-mortar banks. And
Craft sees another "hidden" value: the Internet banks are natural portals, a cheap place to market
mortgage loan upgrades, annuities and other financial products and services.
50% to 70% growth
To investors, this can be a winning combination. "You get a profitable Internet company at a fraction
of the multiple of other Internet companies," says Ryan. "Or, you get a bank with about five times
the growth of a typical bank -- and trading at a discount to its growth rate, which is pretty rare."
That growth amounts to 50% to 70% these days -- whether measured in assets, customers,
revenues or profits. Ironically, this kind of performance has made regulators even more hawk-eyed
about this new business model, which should be of comfort to investors. "This kind of growth just
scares the pants off anybody in Bankland, because we've never seen it before," says Ryan.
Charts
Telebank, NetBank and
Security First vs. S&P 500
over the past year
Related Sites
ClearStation
More upside than down
But the virtual banks are real banks, run by banking and financial-services veterans, and some
investors have already placed their bets. Stocks of Telebank, Net.Bank and Security First
Technologies "are all in strong uptrends," notes Doug Fairclough, founder and investment strategist
of ClearStation.com, a financial Web site that emphasizes technical evaluations. "The strongest
performer has been Security First, but they were all up at least 50% in February alone."
Fairclough expects a correction in these stocks sooner or later, which might encourage new
investors to wait for a dip. But he expects more upside just from examining the entrails of their
technical positions. One caution, however: Trading volume has been low. This means that a few big
players could be making the stocks potentially volatile, with the chance of big intraday price moves.
"If they decide to dump their position, it's going to pull the stock way down," warns Fairclough, "and
you could get whip-sawed by these better-capitalized players. You definitely don't want to chase
these stocks."
Details
Company Report
Earnings Estimates
Research Wizard
Telebank
Telebank is the bigger of the two, at a $600 million market cap. It had an unusual birth, shaped by
national politics. Telebank was founded in 1980 in northern Virginia, a region of bedroom
communities near Washington D.C. It was a tough place for a bank to keep its clients in place, as
politicians and their aides moved in and out of Washington with the political tide.
Beginning in 1992, Telebank became an early adopter of electronic banking systems, using the
telephone and emphasizing CD deposits over checking accounts and other services that transient
clients would likely prefer to move wherever they roamed. Offering high-rate CDs, Telebank was able
to keep thousands of older, wealthier depositors no matter where they lived. Now, on the Internet,
Telebank is reviving its checking-account products.
The upshot has been an early foot in the door of virtual banking, tenaciously loyal customers (who
now refer 30% of new business to the bank) and innovative management developing a range of new
things to buy online. "Telebank knows how to reach customers, motivate them with interesting
products and services and win their business," Craft says, and he rates the company a "strong
buy." Legg Mason rates Telebank a "buy" and predicts growth rates of 51% in deposits, 44% in
assets and 72% in net interest income by 2000.
Details
Company Report
Earnings Estimates
Research Wizard
Net.Bank
Net.Bank was derived from Carolina First, a technologically imaginative regional bank in its own
right. Now accepting deposits from all 50 states, the $322 million company has raised most of its
more than $2.5 billion in deposits directly off the Internet. Founded by bankers, structurally, it still
resembles a traditional bank. Ryan has a "buy" on the stock, however, expecting years of up to
70% growth in customers, assets, revenues and profits. "Actually, some of those things will grow
more quickly," he expects. "They're ramping up their marketing."
Kelley predicts Net.Bank's earnings will double in 1999, but isn't flogging the stock until it's a bit
cheaper. "So earnings are up 100%?" he asks. "Do you pay 100 times earnings? Not in my view."
Still, he muses, such banks are a "very different animal than the traditional. Your deep-value people
say that you buy banks at book value. Well, hell then, you haven't bought a bank stock in the
1990s. And you've left a lot on the table."
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