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Hilltop Holdings (HTH) Rides on Loans Amid Asset Quality Woes

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Hilltop Holdings Inc. (HTH - Free Report) is poised for growth driven by modest loan demand and high interest rates. However, weakening asset quality and weak mortgage business are major near-term headwinds.

HTH’s net interest income (NII) and margin are expected to record decent growth on modest loan demand and high rates. Though NII declined in 2020 and 2021, the metric witnessed a CAGR of 1.3% over the last four years (2018-2022). The rise was partly driven by acquisitions completed during that period and higher rates.

Likewise, Hilltop Holdings’ net interest margin (NIM) is expected to improve in the quarters ahead, though rising funding costs will put pressure on it. In 2022, NIM increased to 2.87% from 2.57% in 2021.

We project NII to increase 2.2% in 2023 and NIM to be 3.03%.

Hilltop Holdings has been increasing dividends on a regular basis since 2016, with the last one announced this January. It also has a share repurchase plan in place. Driven by its earnings strength and strong capital and liquidity positions, the company will be able to sustain its current capital distribution activities.

Like HTH, Hancock Whitney Corporation (HWC - Free Report) announced an 11% increase in the quarterly dividend to 30 cents per share in January. The company has a share repurchase plan in place. In January, the company announced a new share buyback program, under which it is authorized to repurchase 4.3 million shares through Dec 31, 2024. HWC is expected to be able to sustain efficient capital distributions, given a solid liquidity position and earnings strength.

Hilltop Holdings’ asset quality has deteriorated over the past few years. While the company recorded a provision benefit in 2021, it witnessed a substantial rise in provisions for credit losses in 2022 and the first half of 2023 as it continued to build reserves to combat the tough operating environment. The worsening macroeconomic outlook is expected to keep provisions high in the near term. We project provision for credit losses to rise 288.9% this year.

Also, the Mortgage Origination segment’s performance is a matter of concern. While the mortgage volumes increased in 2019 and 2020 (driven by lower rates), the same decreased in 2021 by 1.3% and in 2022 by 44.2%. The declining trend continued in the first six months of 2023.

To counter reduced loan volumes and pressure on profitability, PrimeLending is taking several measures, including reducing the headcount, consolidating unprofitable branches and making adjustments in target fixed costs. Rising mortgage rates will likely hurt origination volumes in the quarters ahead, straining the segment’s performance. We project the Mortgage Origination segment's non-interest income to decline 27.4% in 2023.

Similarly, rising mortgage rates are hurting Prosperity Bancshares (PB - Free Report) . While the company’s mortgage income increased in 2020 and 2019, it declined in 2021, 2022 and the first six months of 2023. Higher mortgage rates have been adversely impacting mortgage origination volumes and refinancing activities. Thus, PB’s mortgage banking business performance is expected to get hurt in the quarters ahead.

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