I recently came across an interesting investment opportunity that I wanted to share with you. It’s about the Bank of N.T. Butterfield & Son (NYSE: NTB), a financial institution that caters to high and ultra-high-net-worth individuals in Bermuda, the Cayman Islands, and the Channel Islands. This bank is currently being undervalued by the market, which presents a potential investment opportunity.

One of the key strengths of NTB is its solid financial position and risk management approach. They have a loyal customer base, built over many years due to their long-standing history and high-quality services. This has resulted in a reliable and stable source of funding, mainly from deposits of wealthy clients.

Another significant advantage for NTB is the limited competition they face in their markets. The barriers to entry are high, making it unlikely for new competitors to emerge. Moreover, their well-established brand and strong client relationships give them an edge when it comes to serving clients who prioritize a personal relationship with their wealth manager.

Financially, NTB has been performing well. They have a diversified income stream, with more than 30% of their revenue coming from non-interest income. This includes tailored solutions such as trust business and foreign exchange revenue. In fact, their net income increased by around 32% between 2021 and 2022, which is impressive considering the stability of their deposit base and improved cost structure.

Despite these positive aspects, the market seems to be overlooking NTB’s true value. The price-to-tangible book value (P/TBV) ratio is lower than its historical average, which is unjustified given the bank’s stable asset classes and activities. Rising interest rates are also benefiting NTB, as their interest income is growing faster than the interest they pay on liabilities.

So, what’s the potential return on this investment? Well, based on our assessment, there is a possibility of returns ranging from 18% to 22%. This valuation takes into account various factors, including historical multiples and comparisons with similar banks.

Of course, it’s important to consider potential risks. There’s always the chance of reputational damage or scandals affecting NTB’s position and competitive advantage. Changes in regulations could also impact the bank, given its operations in unique jurisdictions. Additionally, losing deposits and the need to increase interest rates paid to customers could pose challenges.

To sum it up, I believe that the Bank of N.T. Butterfield is a solid institution with a long history of serving its niche market effectively. The current market undervaluation provides an opportunity for investors. The potential returns range from 18% to 22%, making it a compelling investment prospect.