INTERNATIONAL BANCSHARES CORPORATION

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

International Bancshares Corporation (IBOC) is a Texas-based financial holding company primarily focused on serving the banking and financial needs of small to medium-sized businesses and individuals.

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:

IBOC is a financial holding company that operates through its subsidiaries in Texas and Oklahoma. The company’s primary business involves providing commercial and retail banking services.

  • Revenue Distribution: IBOC generates revenue primarily through:
    • Interest Income: This is the income from loans and investments, the core of their business model.
    • Non-Interest Income: This includes service charges on deposit accounts, brokerage fees, trust income, and other fees.
  • Industry Trends:
    • Interest Rate Environment: The banking industry is highly sensitive to interest rate fluctuations. Changes in the federal funds rate or the general interest rate environment can significantly impact net interest income. When interest rates are high, banks can earn more on loans, but when interest rates decrease, margins are squeezed.
    • Regulation: The banking industry is heavily regulated, which can lead to high compliance costs. Regulations also determine their capital requirements, which will limit their operations and lending capabilities.
    • Technology: Banks are investing more into technology to offer digital banking services. Digitalization allows companies to capture more clients, while also decreasing costs associated with brick and mortar business models. Banks have to be aware of cybersecurity risks and other security threats.
    • Competition: The banking industry faces competition from large national banks and regional banks. There is also increasing competition from fintechs that offer innovative solutions for money management.
    • Economic conditions: Economic conditions greatly influence a bank’s business by impacting loan demand and credit losses. A recession will increase credit defaults and lower demand for credit. This means banks have to set aside larger loan loss provisions as the economy declines, increasing expenses and limiting profitability.
  • Competitive Landscape:
    • IBOC’s competitive landscape varies according to the geographies and lines of business, as they compete with regional and national banks. Some regions and lines of business are more competitive and fragmented. Smaller banks might compete on price and service. Larger banks, in addition, to price, compete on the scale of distribution, diverse products, and technological superiority. Local and regional banks compete with IBOC’s subsidiaries for clients as well.
  • What Makes IBOC Different:
    • As a regional bank, they claim to offer more personalized services and better customer knowledge.
    • Their strong Texas focus differentiates them from other banks.
    • While they continue to grow geographically, their focus is still based on community banking.

Financials Analysis

  • Net Income and Margins:
    • IBOC’s net income for the three months ended September 30, 2023 decreased to 99.7 million dollars compared to $102 million in 2022. This could be attributed to higher expenses and an increase in the allowance for credit losses. In a long term perspective, profits have been on a very good uptrend.
    • Net interest income increased from $156 million to $184 million YoY in the last quarter (ending Sept 30, 2023), although it was slightly decreased compared to 186 million in the quarter before.
    • Net interest margin remains healthy, 3.79% YTD.
  • Revenue Growth: Revenues have seen a fairly consistent growth over the past several years. While revenues aren’t growing explosively, the company has been able to increase them significantly through acquisitions and operational improvements.
  • Loan Portfolio and Credit Quality:
    • Total loans increased from 11.26 billion dollars in Dec 31, 2022 to 12.65 billion dollars in Sep 30, 2023. This shows a good level of growth.
    • Provision for credit losses increased from around $7.2 to 17.3 million. Even though credit quality remains decent, it does show signs of potential problems with the credit portfolio. Management has increased the loss provisions to proactively prepare for potential future defaults.
  • Balance Sheet:
    • IBOC’s balance sheet demonstrates strength, with assets totaling approximately $18.1 billion as of Sept 30, 2023, compared to 16.5 billion dollars in Dec 31, 2022.
    • A significant portion of these assets is made up of loans, $12.6 billion dollars. This reflects their core business operations in lending to consumers and businesses.
    • The equity is $3.26 billion which ensures strong capitalization.

Moat Analysis:

Based on the information available about IBOC’s business model and financials, the company has a weak moat. Here’s a detailed breakdown:

  • Switching Costs: Switching costs are moderate, but not particularly high. While customers may prefer convenience, there are no huge penalties to switch. The process of moving accounts isn’t hard, and people can generally move to a better bank easily. This puts pressure on the pricing power of the company.

  • Intangible Assets:
    • IBOC has a strong brand within Texas and Oklahoma, but their brand is unlikely to offer them significant competitive advantages outside their region. Their brand, while strong within their region, isn’t strong enough to allow them to charge high prices.
  • Cost Advantages:
    • As an established bank, IBOC may benefit from scale in terms of having more branches and more clients. However, those economies of scale are not very significant as it doesn’t cost that much more to have slightly more scale for other banks, and fintechs can offer the same services through technology.
  • Network Effects:
    • IBOC does not seem to have a network effect. More clients don’t make the bank more valuable for others in a direct or meaningful way.
  • Regulatory Barriers: There is a limited regulatory moat. While there are strict regulations in the financial industry, IBOC does not particularly benefit from those in a meaningful way over other large national banks or other regional and local banks.
  • Moat Rating: 2 / 5 The bank may have a decent name in the local market but it lacks strong structural competitive advantages and the ability to command significant premiums. This warrants a low moat rating.

Risks and Resilience: * Interest Rate Risk: Changes in interest rates can affect profitability and the cost of capital, greatly impacting the ability for the bank to earn a net interest spread. This effect on their business will depend on the length of term that their assets and liabilities are made for. * Credit Risk: Economic downturns may lead to credit defaults. As seen from the last quarter, they had to increase loan-loss provisions, meaning they are exposed to potential future defaults by their customers. * Regulatory Risk: Changes in banking regulations can impact their capital requirements and ability to lend and operate. New regulations are likely to be put in place in the coming years which might disrupt the banking sector as a whole. * Competition: Strong competition from national banks, regional banks, and fintechs can limit their growth potential. New disruptive innovations from FinTech can take away market share from traditional banks. Business Resilience * Even in light of those risks, IBOC has shown the ability to be resilient through business cycles, being a proven business model, which makes it less likely for them to go bankrupt. This is further bolstered by the company’s strong capitalization and the large amount of assets they hold. As seen from the last quarter, though there were some signs of increasing bad loans, the bank has been proactive in increasing loan loss provisions to compensate.

Understandability Rating: 3/5

The business model of IBOC is fairly straightforward to understand, it involves taking deposits and providing credit to clients. However, there are many complex mechanisms, such as derivatives, that go into running a bank. There is also reliance on complex regulation that an investor would need to understand. There are also various risks in the banking industry that need to be understood and weighed for investment viability.

Balance Sheet Health Rating: 4 / 5

Overall, the balance sheet for the bank is healthy, exhibiting strong capitalization, asset growth, and an ability to continue to grow. It also shows resilience to the industry forces by proactively increasing its loan-loss provisions. However, their debt-to-equity ratio is relatively higher, meaning that it is a levered company. Even though their debt is mostly well-secured through loans, it can negatively affect them during economic downturns.