On Feb 2, 2015, we issued an updated research report on Texas Capital BancShares Inc. (TCBI). Shares of this bank have fallen nearly 9.9% year to date. We believe pressure on margins, rising trend in expenses and higher provision for credit losses have weighed on the company’s fundamentals.
Texas Capital’s net interest margin (NIM) came in below 4.00% throughout 2014, reflecting growth in loans with lower yields along with considerable increase in liquidity assets. Notably, NIM reduced to 4.22% in 2013 from 4.41% in 2012 and 4.68% in 2011, primarily reflecting reduced interest income as a percent of earning assets, partially offset by reduction in funding costs. Management expects NIM to remain under pressure and to be in the range of 3.4% to 3.5% in the coming quarters.
The company continues to witness an increase in expenses, which rose at a 5-year compounded annual growth rate (CAGR) of around 14.9% in 2014. This reflects poor expense control and is expected to adversely affect top-and bottom-line growth. Though the company’s efforts to hire experienced bankers and expand its presence are encouraging, the resultant expenses, which continue to rise at the same rate as the revenues negate the incremental effects of business expansion. Notably, management expects non-interest expenses to grow in the low to mid teens, slightly impacting efficiency ratio in the first half of 2015.
A less diversified geographical footprint and mounting expense will continue to mar Texas Capital’s growth. Also, stricter capital norms are being proposed for the banking industry. Though such measures are aimed at improving the overall health of the banking system, we believe that such capital norms might limit the company’s flexibility with respect to its lending volumes and investments in growth initiatives in the medium term.
Further, analysts’ bearish stance on the stock was reflected in the estimate revisions over the past 30 days. For 2015, the Zacks Consensus Estimate declined 8.5% to $3.01 per share and 13.6% to $3.49 per share for 2016. Hence, Texas Capital currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the banking space include Preferred Bank (PFBC), Western Alliance Bancorporation (WAL) and Navient Corporation (NAVI). All three stocks sport a Zacks Rank #2 (Buy).
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