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Sitting Down with Novantas | Steve Scruggs

Steve Scruggs, director of research and senior portfolio manager at Bragg Financial

Bragg Financial Advisors has been managing money for families and institutions for more than 50 years. The Charlotte-based firm now has a portfolio of more than $1 billion, including substantial investments in financial services. Steve Scruggs is the director of research and senior portfolio manager for Bragg Financial Advisors and also serves as the primary portfolio manager for the firm’s two mutual funds. The Novantas Review recently talked with Steve about his views on the banking industry.

Q: How do you feel about the sector in 2019?

A: We feel pretty good in that banks are extremely profitable and well-capitalized and the trends look good. Things could hardly look better on the one hand, but on the other hand, we are 10 years into an expansion. We have seen lending standards trending down in riskier areas like leveraged loans. Given where we are and what the companies look like, valuations seem attractive and in some cases, we see some real value. For those companies, there’s nothing glaring like we had with subprime in 2008. These companies are priced for slow growth and moderate increases in interest rates. If something disruptive should happen, we think, given how they are capitalized, they couldn’t be capitalized any better. All in all, we are favorable in certain areas on a company-
by-company basis.

Q: What do you anticipate for interest rates this year?

A: We think a lot has changed in the last couple of months, given where we were in November with the outlook and the posturing of the Fed today. We don’t make interest-rate predictions, but like everybody else, it looks like we will get one more hike this year.

Q: What types of institutions do you favor in your portfolios? National banks? Regional banks?

A: We are barbelled. We have major banks; J.P. Morgan is one of our biggest holdings. We have Bank of New York and U.S. Bank and then we have niche banks like Axos and Hilltop Holdings. The smaller companies are doing things with innovative managements. Banks have to figure out how they are going to compete and if they are going to be a big bank with scale or if they are going to be a community bank and sell service through branches. Regional and smaller banks, because of the lack of scale, are inhibited by the amount they can invest in technology, which is obviously driving the disruption. We favor the national banks over the regional banks. For so long, it was a branch network and that was how you attracted deposits. Now, it is changing pretty rapidly. You need to capture the data, analyze the data and push services to clients in digital ways instead of waiting for someone to walk into a branch and trying to sell them something.

Q: Has that breakdown in your holdings changed over the years? If yes, how so and why?

A: It is all about what is your proposition and what are you offering. Community banks offer service and knowing your customer. The big guys are all about digital applications that analyze the data. They can know millions of clients far better than two tellers in a branch can. Coming into 2007 and 2008, we had quite a number of community banks in our small-cap portfolio. Fortunately, we got out of them. As we came out of the 2008-2009 mess, we have gone back to look at them. When you see what some large companies are doing and how they are gathering deposits, and what they are offering, it’s really hard to see how a lot of community banks can do that. It’s not like there’s a crisis, but it’s more of a long-term thing. It’s not that they are doomed or bad investments. It is that there are more attractive ones because of technology.

Q: How do you weigh the secular changes taking place in the industry versus the cyclical changes?

A: They play hand in hand. It’s about how well you know your client and how you get in front of them. Long-term, there are big changes. As for the cyclical changes, we are looking at interest rates and NIM. One of the things about this cycle has been how slow deposit rates have moved up relative to interest rates.

Q: What do you think of the BB&T-SunTrust merger and the future for bank M&A?

A: They are getting scale. From a fundamental perspective, they are both conservatively-run, really profitable banks. It looks like a really good deal. It’s definitely going to be a big win for Charlotte. Folks are going to realize that you have to figure out how you are going to compete. A combined BB&T-SunTrust is going to be able to make investments to enhance the product offerings. I wouldn’t be surprised to see a lot of this continue to happen or the pace pick up.

Q: How much are deposit costs a factor in your investment decisions?

A: We eyeball them, but it is mostly when companies report earnings and we see the trends.

Q: Have banks closed enough branches?

A: The big guys have the convenience factor. If you have enough deposits per branch, you can somewhat justify them. The community banks continue to add branches — it’s like they are doing things the way they have always been done. It may work but it won’t work as well as other models. The value in those branches are those loan officers who have the local relationships to generate on the asset side. Those relationships are very valuable, but how do you gather the deposits to find those?

Q: Do you consider fintech to be a threat to traditional banking or do you see them as partners with the banks?

A: It’s both. The smaller banks will have to go with partnerships like with robo-advisors. The big banks look to either build or buy. The underlying technology may not be too terribly complicated if you have the scale and can roll it out in a big way. When it takes off, there is a lot of hype and redundant products. How are you going to make money off them and from whom?

Q: Tell me a little bit about your personal banking habits. When was the last time you were in a branch or wrote a check?

A: I’m a bank’s worst customer. I think I still have the same no-fee checking account that I got in college. I have ACH set up to pay bills. It’s been years since I have been in a branch. My goal is for them to generate as few fees off me as possible.

Robin Sidel
Director, New York

For more information, contact Novantas Marketing

+1 (212) 953-4444

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