Greene County Bancorp: It’s time to make a profit (NASDAQ: GCBC)

Recommendation worked well

On January 10, 2021, I wrote a detailed analysis of why Greene County Bancorp (NASDAQ: GCBC) is an undervalued gem in banking. Since then, GCBC’s share price has doubled, representing a CAGR over 60%. Therefore, although GCBC remains a fundamentally sound community bank, I believe it is time for investors to take some profits as GCBC is now considered overvalued and there are not many factors that can support the sharp increase of the stock price. You can read my original analysis here: Greene County Bancorp: An Undervalued Banking Gem.

Fundamentals remain strong but valuation is too optimistic

First, I think GCBC remains a very strong community bank in terms of business model and strategy. The company continued to show strong profitability and performance in FY21, with net income up 27.9% to $23.9 million and book value per share up 15% to $17.57. NCOs and NPLs even decreased compared to FY20 and represented 0.07% and 0.24% of the loan portfolio, respectively. This reiterates GCBC’s strong profitability, financial position and underwriting diligence, which was key to my buy recommendation previously. I am confident that in the event of an impending recession, GCBC will be able to weather the storm well and emerge stronger.

While the market has come to recognize this strength of GCBC, I think it is now overly optimistic about the company’s prospects. At a share price of $51, GCBC is currently trading at a P/B of 2.9 and a P/E of 18.1. These are both very high relative to peers and GCBC’s own historical valuation. As P/B is a better valuation measure for banks, I will focus on this ratio.

From the table below, which shows the different percentiles of GCBCFrom historical P/E ratios (I used data up to 2007 to include GFC 08-09), we can see that at the current level of 2.9, GCBC is trading well above the 90th percentile!

percentile	P/P
10th	1.44
25th	1.53
50th	1.65
75th	1.97
90th	2.52

Source: author’s calculations

Moreover, comparing with similar community banks, the 10-year average BP of these banks hovers around 1.5x, reinforcing the fact that GCBC is undoubtedly expensive now. I believe that at these multiples, investors are valuing GCBC’s growth far too much, which will be unlikely since GCBC does not engage in M&A activity and relies solely on organic growth. Over the past five years, the average book value growth rate has stood at 13%, which is an optimistic figure for the future as economic support for businesses is gradually reduced. In fact, book value only increased 6% year-over-year in 1H22.

Taking a bearish, base and bullish book value growth estimate for FY22, we can see that the forward P/B still remains extremely high and unwarranted.

Inflation and rising interest rates are unlikely to accelerate growth rates

A bullish proposition on bank stocks is that banks could act as a hedge or even benefit from inflation and rising interest rates, as this would lead to higher net interest income. However, since book value is a better indicator of a bank’s value, I have analyzed the historical relationship between the growth of GCBCbook value (%), inflation rates (%) and federal funds rate (%) and concluded that there are no clear relationships.

Statistically, I found the correlation coefficient for the former to be 0.33 and the latter to be -0.30, both showing poor linear relationships. Therefore, I do not believe that it is necessary for rising rates and inflation to translate into greater growth in the book value, therefore the intrinsic value of GCBC.

The impending recession will be negative for bank stocks

The next reason will be market related. Bank stocks are usually one of the hardest hit when an economic recession hits. In the GFC, GCBC recorded its slowest book value growth in a decade at 3.4%. Additionally, its P/B fell to 1.41 and 1.36 for 2008 and 2009 respectively.

Therefore, with an expected economic downturn on the horizon, I believe GCBCthe growth of in the coming years will be hampered and in the event of a recession, it is very likely that there will be downward pressure on the stockthe multiples of. Therefore, given the strong optimism towards GCBC and the high share price, I think it would be a good time for investors to take profits now. If GCBC reprices to a “recession” multiple, we are looking at a 50% drop in share price!

Insider buying ceased in November 2021

In my previous article, another positive development supporting a buy was strong insider buying of the stock. However, I noted that insiders have stopped adding new shares since November 26, 2021, where the stock price was trading around $33 – close to my estimate of GCBC’s fair value for the year. last. While the absence of insider buying doesn’t necessarily mean much, I think the pause in insider buying strongly suggests that even management believes the company is now overvalued. Given that GCBC insiders have traditionally added positions frequently, a six-month break appears to reveal their view of the stock price now.

Review of technological developments in GCBC digital services before returning in the future

Finally, as GCBC remains a solid company, I would certainly like to buy it again should it present a much more attractive opportunity in the future. However, one aspect of development I will focus on is GCBCtechnological improvements. In my previous article, I had already pointed out that in the face of emerging digital banks offering higher interest rates, comprehensive and easy-to-use financial solutions, traditional banks will have to complement their offerings with a solid digital platform. However, GCBC doesn’t talk much about its investments in technology, which continued in the FY21 annual report.

Therefore, I would really like to see more clarity and concrete developments in this aspect in the future before returning to a position because it is important to be digitally comfortable to capture the new generation of customers.

Selling Risks

Here are some risks that could further boost GCBC’s share price and make selling the stock now seem like a bad idea in hindsight.

1. Increase in dividends

GCBCThe current dividend yield is low for a financial company at around 1%. Its payout ratio is also low at 17%. Therefore, if management decides to significantly increase the dividend yield, it could lead to an increase in the share price.

2. Greater rotation towards “safer” assets

With falling share prices in the market and greater volatility, investors looking for safer assets/companies may turn to small caps and/or banks like GCBC, which will further boost share prices. shares. Given GCBC‘s run up, it could also attract more dynamic investors who could bring more demand for the stock.

However, I think it is not wise to predict the future, so if a good opportunity to sell is already present now, investors should not be greedy and expect much more.

Conclusion

Overall, I believe the market is pricing in too much optimism and growth for GCBC today, which I believe cannot be sustained. Rising inflation and interest rates are also unlikely to be a significant driver for GCBC.India’s loan portfolio and an impending recession add the risk of falling growth and valuation multiples. Therefore, I believe now is the time for investors to sell some or all of their GCBC shares. Given that the stock market is down, I think it’s also prudent to take gains here and deploy capital into other investments that could generate higher long-term returns than GCBC.

Note: I will give GCBC a holding rating despite encouraging investors to take profits, as I believe the company remains fundamentally strong; therefore, I will not recommend investors to go short here, as GCBC may still continue to trade sideways in the coming years. For investors new to GCBC, I encourage you to keep this company on your shortlist and wait for a better buying opportunity to present itself.