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Neutral Stance on Prosperity

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On Jul 2, 2013, we reiterated our long-term recommendation on Prosperity Bancshares Inc. (PB - Free Report) at Neutral. This is based on the company’s continuous acquisitions, organic expansion and solid first-quarter 2013 earnings. However, we remain concerned about Prosperity’s mounting expenses.

Why the Neutral Stance?

Prosperity’s first-quarter 2013 adjusted earnings of 86 cents per share beat the Zacks Consensus Estimate of 84 cents. This also compared favorably with the year-ago earnings of 77 cents. Results were aided by top-line growth, partially offset by higher operating expenses. Moreover, loan and deposit balances improved in the quarter. Further, capital ratios were stable, while credit quality was a mixed bag.

Following the earnings release, the Zacks Consensus Estimate rose 0.6% to $3.50 per share over the last 60 days. Moreover, for 2014, the Zacks Consensus Estimate went up by 0.8% to $3.60 per share over the same time frame. The company currently carries a Zacks Rank #2 (Buy).

Acquisitions have always been a vital part of Prosperity’s growth strategy. Following four major deals in 2012, the company completed the merger of East Texas Financial Services Inc. in Jan 2013 as well as the merger of Coppermark Bancshares, Inc. and the latter’s fully-owned subsidiary Coppermark Bank in Apr 2013. All these are expected to increase the company’s geographical footprint and boost its market presence in the existing areas.

Additionally, Prosperity’s solid capital position and its capital-building ability will likely result in a better financial position, which will help the company in fulfilling stringent capital requirements. Moreover, Prosperity’s strong organic growth and improving credit quality is expected to boost the company’s financials in the near term.

On the flip side, intense competition in the banking industry is expected to result in continuous deposit pricing pressure, sluggish loan demand and a low interest-rate environment, which would weigh on Prosperity’s net interest margin (NIM), thereby creating headwinds for revenues.

Moreover, a persistently low interest-rate environment, slow economic growth rate, exposure to the real estate loan portfolio and stringent regulations will likely dent the company’s financials in the near term.

Other Banks to Consider

Some financial stocks that are worth a look include First Financial Bankshares Inc. (FFIN - Free Report) , First Interstate Bancsystem Inc. (FIBK - Free Report) and Old Second Bancorp Inc. (OSBC - Free Report) . All of them carry a Zacks Rank #1 (Strong Buy).

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