On Dec 30, 2015, we issued an updated research report on Cullen/Frost Bankers, Inc. CFR. The Texas-based commercial and consumer banking services provider continues to reflect strength in several areas.
Revenues grew at a CAGR of 6.2% over the last three years (2012–2014), with the trend continuing in the first-nine months of 2015 as well. Moreover, the low-cost funding source – non-interest bearing deposits, representing 42% of total deposits, are expected to boost the net interest income and margin driven by low interest expenses. Further, management anticipates loans to grow in the mid-to-high single digit range over the next 12 months.
Driven by a strong capital position, last year the company completed the merger with WNB Bancshares, Inc. which marked the first bank acquisition for Cullen/Frost since 2006 when it bought Fort Worth-based Summit Bancshares Inc. The merger enabled Cullen/Frost to reinforce its Texas franchise and enter the profitable Midland and Odessa markets.
Besides deploying capital in the acquisition strategy, the company also remains focused on enhancing shareholders’ value. In April 2015, Cullen/Frost hiked its quarterly stock dividend by 4% and announced a new repurchase program to buy back shares worth $100 million. Notably, the company has increased dividends annually for 22 consecutive years.
However, several issues keep us apprehensive. With the growing level of non-interest expenses, the company is exposed to operational risks. Non-interest expenses recorded a CAGR of 5.2% over the last 5 years (2010–2014), and continued to scale higher in the first-nine months of 2015. Also, weakness in the energy sector, which is expected to drive problem loans higher in the near term, remains a concern for Cullen/Frost.
Over the past 60 days, the Zacks Consensus Estimate remained stable at $4.51per share and $4.73 per share for 2015 and 2016, respectively. Currently, Cullen/Frost carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Some better-ranked stocks in the finance space include National Bank Holdings Corp. NBHC, TFS Financial Corp. TFSL and Great Western Bancorp. Inc. GWB, each sporting a Zacks Rank #1 (Strong Buy).
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