Associated Banc-Corp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Associated Banc-Corp is a regional bank holding company, offering a range of financial services primarily in Wisconsin, Illinois, and Minnesota. They compete with national, regional, and local banks along with non-banking financial service providers, and have recently emphasized growth in the Commercial & Specialty line of business.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Based on the provided documents, ASB does not possess a strong or wide moat, and earns a score of 2 out of 5. Here’s why:

While ASB benefits from some local presence and customer relationships, the banking industry is inherently competitive, with high barriers to entry. However, these barriers are generally structural rather than company specific. The primary competitive advantage that ASB appears to have is due to strong local relationships and a loyal customer base in its operational region. However, this advantage is easily eroded through competition by other banks in the area.

  • Switching costs: ASB does not benefit greatly from switching costs. Customers of banking institutions, especially retail customers, are primarily motivated by interest rate, convenience, fees, and access to ATMs. Switching banks is typically a simple process for customers, which doesn’t provide a durable competitive advantage for ASB.
  • Intangible assets: While ASB has a recognizable brand in its region, its brand strength does not translate to a strong and durable competitive advantage as the customers can easily switch from one regional bank to another. In addition, it doesn’t have an unique technology or intellectual property which differentiates it from competitors.
  • Network effects: As an operating bank, they do not benefit from network effects.
  • Cost Advantages: ASB doesn’t have a low-cost business model that would provide a sustained competitive edge. Furthermore, being located in the United States as a financial institution means they do not receive a disproportionate cost advantage compared to their competitors, and therefore are vulnerable to competition.

ASB does not possess a strong moat, and its competitive advantages can be overcome by other competitors, especially larger banks with more economies of scale.

Risks to the Moat and Business Resilience The moat and the business overall are vulnerable to a number of factors:

  • Economic Downturns: The cyclical nature of the banking industry means that during a recession or economic downturn, the bank’s profitability can be severely affected. Credit losses and declining demand for loans will negatively affect the business.
    • Business resilience: To counter this risk, the bank tries to take a diversified approach in order to help balance between loan types, industry, and customers. Moreover, they follow a strict monitoring process of high-risk accounts.
  • Interest Rate Changes: Fluctuations in interest rates, particularly any fast increase, will also put pressure on the bank’s profitability. Especially the maturity mismatches in the lending books.
    • Business resilience: The bank manages this by looking for flexibility in the loan structure (floating or adjustable rates, for example) and by trying to balance its funding through a diverse mix of deposits and liabilities.
  • Increased competition: The highly competitive nature of the financial industry, which includes national, regional, and local banks. This increased competition would lead to reduced margins. Moreover, non-bank financial institutions that offer fintech products are putting extra pressure.
  • Business resilience: As of now, the bank focuses on improving customer retention, by offering more specialized products and developing a more customer-centric process, as well as focusing on higher lending rates and profitability.
  • Regulatory changes: Government regulations can change the way banks do business and can also lead to higher costs or less flexibility.
  • Business resilience: The bank tries to remain prepared for such changes by maintaining a diversified portfolio and adapting to new regulations.
  • Technological changes: New fintech companies and technological innovations could disrupt how banking business is performed today.
    • Business resilience: ASB has invested in modernizing its operations, including digital initiatives.
  • Data Breaches and Cyberattacks: Financial institutions are prone to cyberattacks, that could cause severe damages to the bank.
  • Business resilience: ASB is investing in robust security systems and procedures.
  • Loss of Key Employees: The departure of key personnel will cause some disruption.
    • Business resilience: ASB attempts to counter this by developing a deep bench of employees and management.

Business Analysis Associated Banc-Corp (ASB) is a regional bank holding company.

  • Revenue Streams: The main source of revenue for ASB is net interest income. Net interest income is the profit made on lending and borrowings. They also get revenue from services such as brokerage, wealth management, service fees, and other forms of income.

    • Net Interest Income: Historically, ASB has relied heavily on net interest income, a trend that is gradually declining over the recent years as they are diversifying into other sources of income.
    • Non-Interest Income: Fees from services and other forms of income contribute a large portion of revenue to the bank, with a goal for increasing this figure going forward.
  • Industry Trends: The banking industry is in a constant state of change. Technological advancement such as fintech is affecting the way that traditional banking institutions operate. Furthermore, increasing regulations and the rise of alternative banking solutions are also reshaping the business. The focus seems to be on a more omnichannel experience with the banks adopting new strategies on data management and security. The customer focus and loyalty is another area of key performance which drives growth.
  • Competitive landscape: ASB faces competition from other regional and national banks, as well as non-banking institutions offering various financial services. The market is extremely saturated and therefore competition is stiff.
  • What makes ASB Different: They are a regional bank that emphasizes the importance of local markets and strong customer relationships. They tend to have a good reputation in their operational region.
  • Financials: By analyzing financial statements from the last 3 years, we get a clearer idea of the operational and financial health of the bank. Here we will go over it all:
  • Net Interest Income: Net interest income has increased consistently from 2020 to 2022, increasing roughly from $1.07B in 2020 to $1.22B in 2022.
    • It represents the difference between the interest that the bank earns on loans, and the interest that it pays for deposits and borrowing.
  • Noninterest Income: While net interest income is still the largest contributor, ASB has also seen their noninterest income grow from $375M in 2020 to $449M in 2022. * It’s mainly driven by gains in securities, and revenue from wealth management.
  • Operating Expenses: Operating expenses are consistently increasing and have grown from $1.119B in 2020 to $1.287B in 2022.
  • Net Income: The net income is also quite inconsistent, coming in at $331M in 2020, $282M in 2021, and $277M in 2022.
  • Return on Equity (ROE): ROE has been quite inconsistent over the last few years, starting with 10.9% in 2020, which dropped to 8.2% in 2021 and then rose to 10.1% in 2022. This variability is something to keep an eye out for going forward.
  • Return on Assets (ROA): ROA remains a relatively stable and healthy metric. It averaged 1.1% in 2020, 0.9% in 2021, and 0.9% in 2022.
  • Efficiency Ratio: Efficiency ratio has been consistently decreasing from 70% in 2020 to around 63% in 2022. Which is a good thing as a lower ratio means the bank is becoming more efficient.
  • Assets: ASB’s total assets have consistently grown from $40.2B in 2020 to $46.3B in 2022. This implies stability and good growth for the bank.
  • Liabilities: Total liabilities have grown from 37.6B in 2020 to $42.5B in 2022, in line with the asset growth mentioned before. The company has a good balance between assets and liabilities, and this provides financial safety to the business.

Understandability I am rating the understandability at 2/5 for the following reasons:

  • The banking business in itself is quite complex and it requires a bit of financial knowledge to understand it fully. Understanding all the aspects of the bank, such as loans, deposits, net interest income, and non-interest income will be difficult for the general investor.
  • There is the added difficulty in understanding the full implication of financial statements and all the non-operating and one-time expenses.
  • Finally, macroeconomic factors can highly influence the banking industry, which makes it more complex to value and understand this business.
  • The high level of regulation can also put further strain on the understanding of the bank.

It is complex to understand the banking sector fully, and requires a deep understanding of financial terms and their implications, and due to this, I will assign the company a low understandability score.

Balance Sheet Health ASB’s balance sheet appears healthy, and receives a 4/5:

  • The bank has total assets of $46.3B, and a total liability of $42.5B. This signifies stability and the ability to cover liabilities.
  • The debt/equity ratio for the bank is good and manageable for its size. The bank also keeps its interest expenses manageable.
  • The bank has high reserves, therefore it’s able to handle any economic downturn in the near future.
  • As seen above, their ROA and ROE ratios have been decent in the past.
  • They have a diversified portfolio in terms of assets as well as customer base, minimizing credit risk.

The bank’s balance sheet appears quite healthy, indicating a sound financial state.

Recent Concerns and Problems

  • Credit and market risk: The main concern for management remains managing the credit and market risk within their portfolio in the face of a potential economic downturn. This also includes the effects of higher interest rates, as mentioned in their earnings calls.
  • Regulatory Hurdles: The banking sector is susceptible to a plethora of regulatory changes, which if not met properly, may hinder the performance of the bank.
  • The management has shown awareness of this, and they are trying to be fully complaint to the guidelines laid out.

Based on all the information, it appears ASB is a company which while not having a strong moat, operates in a well-established industry with a solid business model, and generally good financials. Further research is required to understand their future growth and whether they can develop new avenues of growth.