If you live in Detroit, you might be familiar with the city of London, a smallish town in the province of Ontario, about halfway between the Motor City and Toronto, Canada’s banking capital.
London also happens to be the headquarters of VersaBank (VBNK), Canada’s first digital bank, which happens to be traded on the Nasdaq in addition to the Toronto Stock Exchange.
I'm probably tempting fate with my editor by writing about a tiny stock in terms of market cap and trading volume. The former is $293 million, while the latter is 17,456, VersaBank’s 30-day average volume.
Truthfully, I’m writing about the bank because I just completed some work for a Toronto client that included a small write-up about the bank. I’ve liked it for some time, but I’d forgotten that it’s been U.S.-listed since its IPO on Sept. 22, 2021.
In the past 52 weeks, its shares are up 44%, considerably better than the 1.5% return for JPMorgan Chase & Co. (JPM).
If that’s not enough to convince you to take a look, here are three other reasons it punches above its weight.
What Makes It Special?
VersaBank does two things: It collects deposits and makes loans. It is a “branchless” digital Schedule 1 Canadian bank. Its B2B business model uses technology to compete in underserved markets, while running a very efficient business. In 2023, its efficiency ratio improved by 1,200 basis points to 43% from 55% a year ago. When it comes to the efficiency ratio, lower is better.
The best part about its commercial banking model is that it doesn’t deal with the end-user depositor or finance client. It works through its network of Canadian bank-owned brokers, over 120 small and mid-size financial advisory firms, and 100 insolvency professionals.
“We have focused on specific niches in which we have developed a wealth of experience, including financing well-established corporations and public sector entities,” VersaBank’s homepage states.
“Our seasoned team of expert lenders encompass two primary areas: Point of Sale Financing (e-Commerce), and Project Financing which encompasses Public Sector Financing as well as Real Estate and Development Financing, and Commercial Lending. Each group operates throughout Canada, providing lending services from coast to coast.”
Both its deposits and loans are secured through the professionals mentioned previously. Because of this streamlined staffing, its asset-to-employee ratio is 4x higher than the average traditional bank.
VersaBank finished fiscal 2023 (October year-end) with total assets of CAD$4.2 billion ($3.11 billion). Its deposits and average loans were CAD$3.53 billion ($2.61 billion) and CAD$3.76 billion ($2.78 billion), respectively, as of Oct. 31, 2023.
Its three long-term goals are to grow total assets to CAD$6 billion ($4.44 billion), its efficiency ratio to 35%, and a return on common equity of 20%, up from 11.75% in 2023.
Its net interest margin, or NIM, in 2023 was 2.68%, only two basis points less than a year ago, despite the much higher cost of funds. NIM is one of banks' most important metrics to measure their success. VersaBank is doing just fine.
Remarkably, its provision for credit losses in 2023 was CAD$609,000 ($450,508), just 0.02% of its average loans.
VBNK Stock Was Dirt Cheap Until December
On Dec. 12, VersaBank closed Nasdaq trading at $8.01. It reported record Q4 2023 results before the markets opened the day. By Jan. 4, its shares were trading 40% higher.
“Another record quarter capped off another record year as continued strong growth in our loan portfolio increasingly enabled us to capitalize on the significant operating leverage in our unique, branchless, business-to-business, partner-based digital banking model,” said VersaBank CEO David Taylor in its Dec. 13 press release.
“29% growth in total assets for the year, which pushed us well past our $4 billion milestone, drove an 86% increase in annual net income, improving our banking
efficiency ratio for the year to 43% from 55% and return on common equity at the end of the year to just under 12% for the year and just under 14% for the fourth quarter from 7.3% last year.”
VersaBank finished 2023 with a net income of CAD$1.57 ($1.16) per share, 99% higher over 2022, and a book value per share of CAD$14.00 ($10.36), 13% higher year-over-year.
So, based on its share price before announcing earnings, it was trading at 6.9x its 2023 EPS. After the price move, it’s still trading at 9.7x, trailing EPS.
The one analyst estimate for 2024 EPS is CAD$1.97 ($1.46). Based on that, VBNK currently trades at 7.7x earnings. JPM trades at 10.6x its 2024 EPS estimate of $16.04.
While I understand I’m comparing apples and oranges, I think it’s important to point out that it remains a value play despite the 40% move in its share price over the past six weeks.
You Get Its Cybersecurity Subsidiary for Next to Nothing
VersaBank has a small IT security assurance services firm, DRT Cybersecurity Inc. (DRTC), based in Washington, D.C. It has more than 400 clients across North America. Its clients include retailers, financial services companies, and many other large businesses and organizations.
In 2023, DRTC had revenue of CAD$9.7 million ($7.18 million), 66% higher than a year earlier, with CAD$1.03 million ($760,000) net income, up from a CAD$1.33 million ($980,000) loss in 2022.
While its revenues and profits are inconsequential, its services to VersaBank are worth its weight in gold. Think of DRTC as a bustling tech department that happens to have 399 other clients to keep it growing.
DRTC is a big reason VersaBank’s technology platform is so dynamic.
As we enter the second month of 2024, VersaBank’s management is confident in its ability to deliver further profitable growth for shareholders.
“As we look ahead into 2024, we remain comfortable with our highly stable low cost funding sources, very sticky deposits derived through our wealth management partners, all of which are term deposits, and our low cost bankruptcy trustee partners. Each has excellent visibility into deposit maturities with very limited risk on expected withdrawals,” Taylor stated in the bank’s Q4 2023 conference call.
It might not be JPMorgan, but that doesn’t mean you can’t profit from it in 2024 and beyond.
I like it a lot, and not just because it’s Canadian.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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