National Post (National Edition)
VersaBank set to trade as a stand-alone
All the security holders have overwhelmingly endorsed the first-of-its-kind transaction, the regulators have given the green light and now all that remains is for the market to give its assessment of the new VersaBank, a one-year-in-the-making revamped structure.
It will get the chance Thursday when VersaBank common shares, which were issued pursuant to merger with its parent, PWC Capital, start trading on the TSX. The shares of the amalgamated entity will continue to trade under the previous symbol, VB.
Dave Taylor, chief executive of the country’s first branchless bank, said an improvement in the stock’s liquidity was one of the goals behind the complicated restructuring. “I would expect a fair amount of trading given that the mystery behind what we were trying to accomplish and whether or not we would be able to accomplish it, has now gone.”
And in creating a standalone entity, a lot of negatives have gone: instead of two public companies (PWC and VersaBank) there is now one (VersaBank); and VersaBank will now operate without the costs and benefits of having a highly leveraged major shareholder, PWC.
The George family owns the now “private” PWC, which has a 32 per cent stake in VersaBank. (Normally a 10 per cent stake is the maximum allowed.) And PWC’s leverage was made worse because VersaBank — which started life as Pacific & Western Bank — didn’t pay dividends.
“We are (now) a standalone bank with way less leverage than the other Canadian banks,” said Taylor, when referring to the effects of the restructuring — a process that cost about $2.5 million to achieve.
So what are the plans for the entity that defines itself as “a technology based and digital Canadian Schedule I chartered bank?”
One of the first assignments will be a visit the Office of the Superintendent of Financial Institutions to request an increase in the so-called leverage percentage or leverage ratio – or the relationship between its Tier 1 capital and its total assets. (That visit will occur after a letter requesting such a change has been sent.)
VersaBank’s ratio of 10 per cent is considerably lower than the other Canadian chartered banks — a move that puts the bank at a disadvantage. In other words the low ratio ensures that its asset base ($1.7 billion according to its latest financial statements) is low.
“Given that we operate an extremely scalable business, and given that we have huge demand for our products, giving us more leverage would allow us to cut through this industry like a knife through hot butter,” noted Taylor when referring to the bank’s high net interest margin and minimal loan-loss performance. Since Oct. 31 2014, net interest margin has grown from 1.96 per cent, to 2.21 per cent in 2015 to 2.31 per cent in 2016.
“With the structure we have and the software we have we could easily be $4 billion to $5 billion of assets,” he added noting that such a scenario “should produce an “attractive” return on equity. Of late, the bank’s return on average common equity hasn’t been stellar: over the past three years it’s been in the 4.15 per cent to 4.50 per cent range. More leverage would boost that return.
When pressed, Taylor said the bank was held back in the past by its leverage ratio. “It was too low,” a situation, he said, could have been attributed to being part of a highly levered group. Indeed when the combined leverage for PWC and VersaBank is determined, the situation was more similar to the other banks.