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On January 10, we initiated our coverage on regional bank, Prosperity Bancshares Inc. (PB - Analyst Report) at Neutral based on its strong growth prospects and continuously falling expenses. However, significant exposure to real estate loan portfolio and stringent regulatory landscape remain the major causes of concern for this Zacks Rank #2 (Buy) stock.

Why the Neutral Stance?

Prosperity’s significant appetite for acquisitions, steady top-line growth and continuously improving credit quality prompted us to initiate with this stance. Further, the company continues to witness a decline in non-interest expenses without resorting to any cost-cutting initiative. Moreover, with a stable capital position and regular dividend payments, Prosperity remains an asset for yield-seeking investors.

However, as a result of the low interest rate environment Prosperity is expected to continue experiencing pressure on its net interest margin. Also, given its significant exposure to the real estate markets, we believe that the company’s financial performance will likely be adversely impacted. In addition, the company’s profitability remains vulnerable to the stringent regulatory landscape and absence of geographical diversification.

Further, in the third quarter of 2012, Prosperity marginally beat the Zacks Consensus Estimate aided by top-line growth, partially offset by higher operating expenses. The company is scheduled to announce its fourth-quarter results on January 25.

The Zacks Consensus Estimate for the fourth quarter is pegged at 84 cents per share. Earnings ESP (Expected Surprise Prediction), the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate, for Prosperity is nil. This implies that the company will report earnings in line with the Zacks Consensus Estimate in the fourth quarter.

Other Stocks to Consider

Besides Prosperity, other stocks in the financial industry that are currently performing well include Cardinal Financial Corp. (CFNL - Snapshot Report) and IberiaBank Corp. (IBKC - Snapshot Report). These two companies carry a Zacks Rank #1 (Strong Buy).
 

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