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BankUnited (BKU) Rides on Rising Loan Demand, Costs Rise

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BankUnited’s (BKU - Free Report) robust loan balance and efforts to improve fee income are likely to continue supporting revenues in the quarters ahead. Also, the company’s capital deployment activities reflect a strong balance sheet position. However, elevated expenses and exposure to risky loan portfolios make us apprehensive.

BankUnited’s organic growth remains solid. While revenues declined in the first quarter of 2022, in 2020 and 2019, the same saw a seven-year (2015-2021) CAGR of 1.5%. With decent loan growth and the company's efforts to improve fee income, the top line is expected to rise in the quarters ahead. Management expects mid to high-single-digit loan growth for 2022.

BKU has been changing its deposit mix to further support revenues. Management has been strategizing on increasing low-cost deposits, which is likely to provide more support to top-line growth. There has been a persistent increase in non-interest-bearing demand deposits (33.9% of total deposits as of Mar 31, 2022), as reflected in a six-year (2016-2021) CAGR of 24.8%.

The company’s capital deployment initiatives look impressive. BankUnited announced an 8.7% dividend hike to 25 cents per share in March 2022. It also has a share repurchase program in place. In February, the company authorized the repurchase of up to an additional $150 million in shares, with no expiration date. As of Mar 31, 2022, $94.4 million worth of shares were left to be repurchased. The company's earnings strength is expected to help it sustain efficient capital deployment activities in the future.

Analysts seem to have a bullish stance on the stock. The Zacks Consensus Estimate for 2022 earnings moved 3.1% upward over the past 60 days.

However, BankUnited’s mounting expenses on account of rising employee compensation and benefits costs, deposit insurance and professional fees might deter bottom-line growth in the upcoming period. Costs are also likely to be elevated, given the company’s steady technological investments. For 2022, management anticipates expenses to increase at the mid to high-single-digit rate.

Though BankUnited has been lowering its exposure to residential mortgage loans, a still large exposure to the same makes us wary. As of Mar 31, 2022, residential and other consumer loans constituted 36.8% of the company's total loans. Industries like hotels, airlines, cruise lines and others that are hardest hit by the coronavirus outbreak accounted for a large portion of total loans. These high-risk loan exposures might hurt the company's financials going forward.

Further, shares of this Zacks Rank #3 (Hold) company have lost 17.6% so far this year compared with the industry’s 23.2% decline.


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Major Banks Worth a Look

A couple of better-ranked major banks are Comerica (CMA - Free Report) and M&T Bank (MTB - Free Report) . At present, CMA sports a Zacks Rank #1 (Strong Buy) and MTB carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

So far this year, shares of Comerica have lost 16.2%, while that of M&T Bank have rallied 3.9%.

Over the past 30 days, the Zacks Consensus Estimate for Comerica’s current-year earnings has been revised 1.2% upward, while the same for M&T Bank has moved 2.4% north.

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