Wright Express stock bounces back, but regulatory concerns are real
Wright Express' stock has rebounded since word spread last week that potential financial reform would affect the fleet management company's banking subsidiary and could hurt the company's long-term profitability. The company is still not saying much about the Treasury Department's recent proposed reforms, but the company acknowledges in its 2008 annual report that any regulatory changes affecting its banking subsidiary "would be disruptive to Wright Express' operations and could result in significant incremental costs."
Two weeks ago, the Treasury Department issued a 89-page white paper on financial regulatory reform, which included a line that said all companies owning a subsidiary that provides banking services would need to convert to a bank holding company or lose protection through the Federal Deposit Insurance Corp. Wright Express would be affected because it owns Wright Express Financial Services Corp., an industrial loan corporation that it founded in Utah in 1998. The proposal removes an exemption granted to commercial enterprises in the late 1980s that allowed them to own a banking subsidiary -- a "non-bank bank" -- while not being subject to the Bank Holding Company Act.
The report led one analyst to downgrade Wright Express's rating from "buy" to "neutral," which prompted a drop in the stock price from $25.40 to $22.50. The stock has since rebounded and was trading this afternoon at $25.60.
Jessica Roy, a spokesperson for Wright Express, told Mainebiz that the proposed reform "hasn't been put into anything actionable yet" and that "it's something we're monitoring closely." Michael Dubyak, Wright Express' CEO, told The Wall Street Journal that the company isn't in favor of the provision and "will be involved in making sure our voice is heard."
The proposed reform would need to be made law before going into effect, but it's certainly something companies such as Wright Express should be paying close attention to, says Thomas McCrohan, an analyst at financial services firm Janney Montgomery Scott in Philadelphia. It was McCrohan who on June 24 downgraded Wright Express from "buy" to "neutral" because of what the regulatory reform would mean for the company. That rating change sunk the company's stock 11.4% that day. "I think the regulatory environment goes through cycles and we're in a cycle now where we're seeing more regulation, not less. The tone in Washington is solving all problems with more regulation," McCrohan told Mainebiz. "I don't think it makes sense. I don't think Wright Express caused any harm to consumers. I don't think it would benefit the economy as a whole to make Wright Express become a bank holding company."
Wright Express does worry about the regulatory reform. In its 2008 annual report, the company listed changes to its banking subsidiary as a risk factor. "The loss or suspension of the charter for our Utah industrial bank or changes in regulatory requirements could be disruptive to operations and increase costs," the report said.
If the proposal was put into action, McCrohan says Wright Express would have three options: sell Wright Express Financial Services Corp. and avoid the regulation altogether, become a bank holding company and be forced to sell its nonfinancial operations, or convert to a bank holding company and create a new subsidiary to run its nonfinancial activities. "The implications of these options appear to be a net negative for the company," McCrohan wrote in his analyst report.
Not everyone agrees with McCrohan's assessment. Two days after McCrohan's report was released, an analyst at Piper Jaffray & Co., reiterated its "buy" rating on Wright Express stock because "we believe the recent pullback in the shares, due to concerns over the regulatory treatment of ILCs that may never materialize or be phased in over a 5-year period, offers investors an attractive entry point," according to StreetInsider.com.
"Wright Express would be better not having to give up its bank charter, but it's manageable, and they would have years to prepare," an analyst at the firm told Dow Jones Newswires.
Read the Mainebiz profile of Wright Express, "Driving force," from the May 18, 2009, issue of Mainebiz >>
View an interview with Wright Express CEO Michael Dubyak on Mainebiz Sunday >>
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