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Fee Income Growth Aids UMB Financial (UMBF) Amid High Costs

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UMB Financial Corporation (UMBF - Free Report) has been focusing on diversifying operations to non-interest sources of revenues. An improving lending scenario and a favorable interest-rate environment are expected to boost its margins, going forward. 

However, escalating expenses are concerning for UMB Financial, limiting bottom-line expansion. Limited liquidity is another headwind.

Analysts do not seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for UMBF’s current-year earnings was unrevised over the last 60 days.

The Fed’s aggressive monetary policy stance to tame inflation will support the net interest income (NII) of banks, including Webster Financial Corporation (WBS - Free Report) and Regions Financial Corporation (RF - Free Report) . Notably, banks have been reeling under near-zero interest rates since March 2020, which adversely impacted net interest margin (NIM) and NII.

Regions Financial’s NII witnessed a compound annual growth rate (CAGR) of 2.5% over the last five years (2017-2021) and increased in the first half of 2022. This has likely been supported by its solid loan growth trend and rising rates.

WBS’ NII witnessed a CAGR of 3.1% over the last five years (2017-2021) with some annual volatility. The metric witnessed a rising trend in the first half of 2022. Also, the trend is likely to continue on a decent economic scenario and higher rates.

Coming to UMBF’s operating fundamentals, the company’s NII witnessed a CAGR of 10.1% over the last four years (ended 2021) and the rising trend continued in the first half of 2022. Rising rates will further support NII in the upcoming period. 

It witnessed impressive net loan growth in the last five years (2017-2021), seeing a CAGR of 11%. Also, deposits saw a CAGR of 28% in the last four years ended 2021. Although net loans witnessed a rising trend in the first half, deposits saw a decline. Going forward, strong commercial real estate, and commercial and industrial loan demand are likely to remain decent. 

Fee income saw a CAGR of 5.2% for the four-year period ended 2021. In the first half of 2022, the metric witnessed an increasing trend. UMBF’s investment in revenue-producing capabilities is likely to support growth. Going forward, revenues from diverse lines of business and verticals will keep aiding UMB Financial to provide a natural hedge against lower rate environments.

The company’s capital deployment plan reflects its ability to keep enhancing shareholder value. UMBF has been raising dividends annually regularly since 2002, with the latest hike of 15.6% announced in July 2021. Also, the bank has a share repurchase plan in place. In April 2022, the company approved a share-repurchase program of up to two million shares, valid until April 2023. 

However, non-interest expenses flared up, seeing a CAGR of 5.1% over the last four years (2018-2021). The company witnessed a rising trend in non-interest expenses in the first half of 2022. Expenses are likely to remain elevated due to the company’s investments in newer technologies, higher administrative expenses and fraud losses as card use increases. 

As of Jun 30, 2022, UMB Financial had a total debt of $2.93 billion, which was volatile for the last several quarters. Cash and due from banks of $360.2 million witnessed a downward trend over the same period. Given such a high debt burden, the company does not seem to be well-placed in terms of its liquidity profile. Therefore, it may not be able to continue meeting its debt obligations if the economic situation worsens.

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