BankUnited, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

BankUnited, Inc. is a Florida-based regional bank, primarily focusing on commercial and retail banking, while having a national footprint with its SBA and wholesale lending.

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.

Business Overview

BankUnited, Inc. (BKU) operates as a diversified financial services company, primarily focused on commercial banking, but it also has a significant presence in retail banking, as well as SBA and wholesale lending, giving it a national reach. The bank’s core business involves taking deposits and making loans, but it also engages in a range of other activities that contribute to its revenue stream. The major lines of business are split among the following segments:

  1. Commercial Banking: This segment makes up the bulk of BKU’s operations, encompassing commercial loans, real estate loans, equipment leases, and other business-related financial services.
    • This includes offerings to small and medium sized businesses.
  2. Retail Banking: This includes consumer loans, mortgages, and other retail banking services to its customers, and also represents a major component of BKU’s income. The Retail Banking segment includes:
    • Deposits: Checking, savings and other deposit products
    • Lending: Credit cards, personal loans and mortgage lending
    • Other Services: Investment services, private banking, etc.
  3. SBA and Wholesale Lending: BKU also operates a national business focusing on small business administration (SBA) lending as well as originating and selling various loans across the country, creating a diverse network.

A recent development is that the company is increasingly offering banking solutions targeted toward the legal, commercial real estate, and healthcare sectors.

Industry Trends and Competitive Landscape

  • The banking industry has been facing increased competition from non-bank financial institutions and fintech companies, which offer innovative digital services and often lower fees.
  • There is an increasing focus on technological capabilities to enhance efficiency, and to provide better services to a tech-savvy client base.
  • The industry is heavily dependent on the macroeconomic environment, particularly changes in interest rates, inflation, and economic growth.
  • Regulation has been increasing in the industry and has been changing quite frequently since the 2008 housing market crisis.
  • Regional banks typically face challenges in competing with national banks.

What Makes BKU Different

BKU differentiates itself through a few avenues:

  • Specialized Focus: Rather than being a full-blown national or even regional bank, the company seems to be focused on select few sectors such as legal, healthcare, and real estate. This specialization would require a focused understanding of these sectors and the market dynamics.
  • Strong local presence in South Florida, a core market with high growth.
  • Diversified funding profile, including both deposits and borrowings.
  • Relationship-oriented approach, focusing on building long-term ties with customers.
  • National reach through SBA and wholesale lending.

Financials

  • Revenue Composition: The sources of BKU’s revenue are net interest income, fees and commission income and other income. Net interest income is the difference between interest revenue and interest expense, primarily generated by lending activities. Fees and commissions are derived from customer services, while other income mainly from trading, investment and service charges.
  • Margin Analysis: Their net interest margin was at an average of around 2.2% throughout 2023, which is a decent profitability measure. Operating expenses have remained quite steady at around 2.5% through the same period. These numbers suggest that the profitability can increase if the company tries to lower its operating costs.
  • Growth: As a bank, growth is driven by increasing loan volumes and deposits. In the past few years, BKU has shown relatively slow growth as most growth has been offset by increased competition as well as higher interest expenses. However, the bank still grew at around 7% per year on average in the last 5 years, which is a stable base growth rate.
  • Capital Adequacy: BKU has maintained a sound capital position, as measured by a tier 1 capital ratio of about 12% and a total capital ratio of 13.4% in its latest reporting (June 2024), above the regulatory requirements. This signifies the bank’s capability to cushion against potential economic downturns.
  • Asset Quality: BKU’s nonperforming assets are relatively low, hovering under 0.4% of its total assets. This reflects a conservative lending approach and good credit management by the company.
  • Loan-to-deposit ratio: Loan-to-deposit ratios for BKU are around 112%, which signifies that deposits are sufficient to fund the lending business of BKU. This is a healthy ratio for a bank.
  • Liquidity: BKU has strong liquidity, with about $3 billion in immediately available cash and marketable securities as of the end of June 2024. This can allow the bank to weather any liquidity issues if they arise.

Moat Analysis

BKU’s moat is somewhat limited to a few attributes. The “moat”, or long-term competitive advantage, can be categorized at 2 / 5.

  • Switching Costs: BKU has some degree of switching costs associated with its banking products. Customers can find it difficult to switch if they have many embedded products and also because of the cost and effort involved in changing banking partners. However, these costs are not particularly high, because it is relatively easy to switch banks for most customers.
  • Network Effects: BKU’s business does not benefit greatly from network effects, as customers are more unlikely to choose the bank based on size and availability of other users. They mostly depend on services and convenience.
  • Scale and Cost Advantages: BKU has some cost advantages because of its strong focus on a particular geographic region as well as specific industries, but they are not high enough to create an impenetrable wall against competitors. The bank is also relatively smaller than national banks and regional banks and thus may face difficulty in accessing favorable capital.
  • Intangible Assets: BKU has some brand name recognizability in its geographic region, but not at a national level. There are no significant patents or licenses associated with their operation. There are no regulatory licenses that significantly restrict competition for BKU.

Risks to the Moat and Business Resilience

Several risks can erode BKU’s moat and impact its business resilience:

  • Economic Sensitivity: The bank is highly sensitive to macroeconomic shifts, including interest rate changes and fluctuations in economic activity in its region. This can impact loan volumes, funding costs, and overall profitability for the company.
  • Competition: The banking sector is intensely competitive, with large national banks, other regional banks, credit unions, and FinTech companies all vying for the same customers, reducing market share of each competitor. A large amount of competitors exist with greater capacity and better scale.
  • Credit Risk: Like any lending institution, BKU is susceptible to credit risk. If borrowers default on their loans, the bank could be in financial trouble. While their loan quality is good and provisions have been made, they are still a major factor to consider.
  • Regulatory Changes: Stringent regulations affect how BKU operates. These regulations often change making it difficult to adapt to new changes and be profitable while doing so. Regulatory compliance also affects profits.

Understandability Rating: 2/5 BKU’s business model of taking deposits and making loans is relatively straightforward, yet intricacies in managing risk and growth through different banking sectors can make it hard to gauge. The company’s regional focus as well as specialized loan products also increase this complexity. The bank also has an interesting geographical distribution, which, while beneficial, increases the complexity.

Balance Sheet Health: 4/5 BKU’s balance sheet is quite healthy.

  • The bank is well-capitalized, with a tier 1 capital ratio of approximately 12%, above the regulatory requirements.
  • They have a decent liquidity profile, with cash and marketable securities over $3 billion.
  • They are not heavily leveraged.
  • Their nonperforming loans are less than 0.5% of the total.
  • Their loan to deposit ratio is 112%, which is reasonably good.

However, all banks are highly leveraged, and thus the balance sheet of BKU isn’t nearly as strong as many other non-banking entities.

Recent Concerns / Controversies and Problems

  • BKU has seen a small decline in net interest income due to high interest rates since 2022. Management is confident that they will be able to counter this with increased revenue from other segments.
  • Management has noted that the company expects to see a gradual decline in their portfolio due to external market dynamics, which may affect profitability.
  • BKU was penalized with regulatory fines earlier this year for not having adequate infrastructure. They have now created plans to better adhere to regulatory guidelines.
  • There is some concern about the slow organic growth rate.
  • The rising rates has caused the deposit base to flow out into bonds and other higher-yielding products. They have to improve their deposit rates to retain customers.
  • There is a slight decline in market share in the mortgage business.

Summary

Overall, BankUnited presents an interesting financial institution that focuses on both commercial and retail operations, while also having a national reach through SBA and wholesale lending. The bank’s focus on specific sectors may provide an advantage in the long run. While BKU has sound financial and performance metrics, it faces industry-wide competition from tech and non-bank companies. They will need to address the concerns over net interest income and a slowing organic growth rate to maintain long-term value creation. While the bank has an adequate balance sheet, like other banks, there is still a higher risk of financial failure in comparison to other non-banking equities.