FPA Queens Road Small Cap Value Fund on The Bank of N.T. Butterfield & Son Limited
Thesis
Butterfield owns attractive deposit and wealth-management franchises in the Caribbean financial centers of Bermuda and Cayman. The bank generates a strong return on equity while maintaining relatively low-risk assets. Its agreement to acquire CIBC's Caribbean franchises at approximately 1.1 times book value and nine times earnings should roughly double the business while further consolidating attractive markets. The fund accumulated shares at less than ten times earnings and believes the valuation compensates for the integration risk.
“Still, Butterfield remains a well-run banking franchise and were pleased to be able to accumulate shares at less than 10x earnings.”
Key risks
- The CIBC acquisition adds operational integration risk
- The transaction increases balance-sheet risk
- Caribbean geographic concentration remains significant