LPL Stock Deal Clears Way for Bank

Will LPL Financial be getting into the banking business?

While the nation's largest independent broker-dealer says it has no “imminent” plans to own a bank, it now can if it wants to -- thanks to the announcement of a stock distribution by two of the firm’s original private-equity investors.

LPL said Hellman & Friedman would distribute its remaining 12.6 million LPL shares to its partners, while TPG will distribute a portion of its overall holdings to its partners, retaining a 17% stake in the company. Both private-equity firms have been investors in LPL Financial since 2005, and had a combined ownership of 61% of outstanding shares at the time of its IPO in 2010.

THRESHOLD CLEARED

Because private equity ownership is now less than the legal threshold of 25%, the stock distributions now clear the way for LPL to own a bank, if it chooses to.

“Although owning a bank would change the structure of the company and increase its need for capital meaningfully,” Joel Jeffrey, an analyst for Keefe, Bruyette & Woods, wrote in a note to clients, “we believe the incremental earnings could be compelling.”

Jeffrey estimates that LPL could generate an incremental $420 million of annual pretax income if interest rates are above a 200 basis point “interest rate scenario.”

Jeffrey did say he believes that LPL is “unlikely” to start a bank in the near term, however.

Indeed, LPL made no mention of bank ownership in its statement announcing the private equity distribution, and when asked about the possibility, spokeswoman Betsy Weinberger says “We do not have imminent plans to own a bank.”

'LOGICAL AVENUE'

Nonetheless, owning a bank “certainly would be a logical avenue for LPL to pursue, especially given [its] tendency of late to be all things to all people,” notes Dan Inveen, principal and director of research FAInsight, an industry consulting firm.

LPL might be particularly interested in offering a “trust-type solution,” Inveen says, because of its appeal to advisors with high-net-worth clients. “It’s certainly not unreasonable to speculate they will be considering these options,” he argues, “considering their size, the direction they’ve been taking and the fact that they clearly want to do whatever it takes to  attract all different kinds of advisors and clients.”

Christopher Shutler, an analyst following LPL for William Blair, says such a move could both upside and new risks to LPL, the perennial No. 1 on Financial Planning's FP50 list. “The company is well aware of the benefits that a bank could bring, but it is not a slam dunk that they will now opt to become a bank,” Shutler says.

The “major positive” banking would bring LPL could be “significant earnings accretion,” according to Shutler, based on an ability to be able to “earn a better spread on their client’s cash.” Negative consequences, he says, include incremental expenses and the possibility that if banking becomes a large portion of LPL’s earnings, the stock’s multiple “could take a hit” since banks typically carry a lower multiple.

What’s more, rival financial services firms such as TD Ameritrade and Charles Schwab have close banking ties, notes Sanford C. Bernstein analyst Luke Montgomery.

In other LPL news, the company announced today that Oklahoma-based Shaw Financial Services, which has approximately $360 million in client assets, has transitioned to the LPL Financial broker-dealer and corporate RIA platforms.

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