OTC-traded stocks fail to dedicate adequate resources to investor relations
There are close to 600 community bank stocks traded on over-the-counter (OTC) markets. Approximately 56 percent of these trade at discounts to their tangible book. The discount may arise from various factors, including financial performance challenges, lack of stock liquidity and investor relations issues.
If a bank stock trades below its tangible book, management should evaluate improving IR, which involves communicating with shareholders and the investment community about the bank’s performance, and addressing shareholder issues/concerns. A proactive approach to investor relations may reduce the discount and enhance shareholder value.
In an effort to keep costs low, many banks do not dedicate resources to IR. This raises an issue: do IR benefits outweigh the cost to shareholders? The answer is simple. If IR provides a mere 1 percent improvement on a $20 mn market cap, shareholders would benefit by $200,000. This benefit to shareholders is in excess of the annual cost of IR to the bank, so it is puzzling why a bank would consider cost-savings as the controlling factor when considering allocating resources to investor relations. Therein lies the dilemma: why don’t many community banks use IR to proactively service shareholders?’
Investor relations, a strategic management responsibility, is akin to customer service, and is necessary to create a satisfied shareholder base and attract investors, which ultimately contributes to a bank’s stock achieving fair valuation. Unlike large banks, most OTC-listed banks do not dedicate adequate resources to IR, nor do they take a proactive approach to IR to address shareholder concerns including lack of timely and comprehensive bank performance information, equity valuation and interaction with the investment community. The absence of this information makes the stock unlikely to achieve fair value.
A proactive approach has the potential to reduce the discount from the fair price of the stock and generate investor interest in the bank. To accomplish these goals, it is necessary for IR to consider providing the following to service the bank’s shareholders and the investment community:
‒ Quarterly earnings report to provide earnings performance information and factors affecting the performance
‒ Two-way communication to respond to shareholder inquiries
‒ Equity valuation report to provide an independent valuation of the stock
‒ Investor presentations to enhance the bank’s visibility in the investment community.
The importance of IR in concert with equity valuation cannot be over-emphasized for OTC-traded community banks, because the benefit to the bank outweighs the costs. Shareholders are well served by managements employing a proactive approach to IR and providing equity valuation coverage for the stock.
