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On Jan 7, 2014, we reaffirmed our Neutral recommendation on BankUnited, Inc. (BKU). Though the company reported better-than-expected third-quarter results, we remain concerned about its compressed net interest margin as well as exposure to disadvantageous residential loans and an increasingly competitive market.

Why Neutral?

On Oct 22, BankUnited reported third-quarter 2013 earnings per share of 52 cents, comfortably beating the Zacks Consensus Estimate of 46 cents. Results were primarily aided by growth in net interest income, partially offset by decline in non-interest income and higher operating expenses.

The Zacks Consensus Estimate for 2013 advanced nearly 1% to $1.95 per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate decreased 1.6% to $1.81 per share over the same time period. As a result, BankUnited now has a Zacks Rank #4 (Sell).

Given BankUnited’s strong capital and balance sheet levels, the company is well-positioned to expand organically as well as through acquisitions. The company is also a lucrative option for yield-seeking investors as since its inception, in 2009, BankUnited has hiked its dividend twice and maintained the payment regularity.

Moreover, the company is trying to reduce exposure to risky residential loans and provide impetus to commercial loans, which will lead to a steady source of income. As of Sep 30, 2013, commercial loans were 60.0% of total loans and 71.7% of new loans.

However, rising expenses is a major challenge for BankUnited. Going forward, we expect costs to remain high due to the company’s continuous expansion in the New York market.

Further, we are skeptical about BankUnited’s geographic concentration in the highly competitive Florida region. Big players like Bank of America Corp. (BAC - Analyst Report), BB&T Corp. (BBT), JPMorgan Chase & Co. (JPM - Analyst Report), Regions Financial Corp., SunTrust Banks, Inc. and Wells Fargo & Company operate in the region through a huge branch network. Hence, expansion in the region as a profitable company will be quite challenging for BankUnited.

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