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Cullen/Frost (CFR) Rides On Organic Growth Amid Cost Woes
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Cullen/Frost Bankers, Inc.’s (CFR - Free Report) strong loan book, solid net interest income (NII) and steady capital distribution activities are positives. Also, efforts to expand its presence in Texas bode well for CFR's long-term growth. However, the company is affected by mounting costs and an undiversified loan portfolio.
CFR’s deposits witnessed a five-year compound annual growth rate (CAGR) of 9.1% (2018-2023), while loans, net of unearned discounts, recorded a CAGR of 6%. Moreover, branch openings in 2024 will likely aid decent loan demand and deposit growth for the company. Cullen/Frost’s solid loan pipeline and Federal Reserve signaling interest rate cuts in the current year will further support loan growth in the upcoming period.
Strength in the loan book is expected to drive the company’s NII. Though interest rates are likely to be cut down, the expected decline in deposit costs, decent loan demand and exposure to non-interest-bearing deposits will likely boost NII in the upcoming period. Management estimates NII growth between 2% and 4% for the current year. We estimate NII to increase 2.3%, 2.9% and 3.2% in 2024, 2025 and 2026, respectively.
Cullen/Frost has been enhancing its presence in the lucrative Texas markets. In June 2023, the company announced plans to double its financial centers to 34 in the Austin region by 2026. Management opened the first few centers in 2023. It expects to open another 17 branches in the region by 2024. In 2021, Cullen/Frost completed its 25-branch expansion program in the Houston region.
Capitalizing on the success of its footprint growth in Houston, the company planned a similar 28-branch expansion in Dallas. By 2023 end, the Dallas branch expansion reached its two-third mark. Given the pro-business and a low-tax scenario, along with compelling customer demographics in the region, such efforts are apt, and will likely drive deposit and loan growth for Cullen/Frost in the upcoming period.
However, Cullen/Frost’s escalating expenses expose it to operational risks. Non-interest expenses witnessed a CAGR of 9.5% over the last five years (2018-2023). This was primarily due to an increase in salaries and wages, net occupancy, and technology, furniture and equipment expenditure. Going forward, expenses are likely to remain elevated on expansion moves in the Texas region.
Management expects non-interest expenses of 6-8% for 2024. We estimate non-interest expenses to see a CAGR of 4.3% over the next three years (ended 2026).
Cullen/Frost’s credit quality seems to have worsened over the years. The allowance for credit losses on loans as a percentage of total loans increased to 1.33% in 2022 from 1.28% in 2016. Though the ratio declined to 1.31% in 2023, it remains high. Also, the ratio of net charge-offs to total average loans stood at 0.09% in 2022 and reached 0.19% in 2023. Further, credit loss expenses increased to $46.2 million in 2023 from $3 million in 2022. Going forward, any economic slowdown is likely to adversely impact the company’s credit quality.
The majority of Cullen/Frost's loan portfolio comprises commercial loans (including commercial and industrial, as well as commercial real estate loans). Notably, its loan mix underpinned 79.4% of commercial loans as of Dec 31, 2023. The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 4.2% compared with the industry's 4% rise.
Image: Bigstock
Cullen/Frost (CFR) Rides On Organic Growth Amid Cost Woes
Cullen/Frost Bankers, Inc.’s (CFR - Free Report) strong loan book, solid net interest income (NII) and steady capital distribution activities are positives. Also, efforts to expand its presence in Texas bode well for CFR's long-term growth. However, the company is affected by mounting costs and an undiversified loan portfolio.
CFR’s deposits witnessed a five-year compound annual growth rate (CAGR) of 9.1% (2018-2023), while loans, net of unearned discounts, recorded a CAGR of 6%. Moreover, branch openings in 2024 will likely aid decent loan demand and deposit growth for the company. Cullen/Frost’s solid loan pipeline and Federal Reserve signaling interest rate cuts in the current year will further support loan growth in the upcoming period.
Strength in the loan book is expected to drive the company’s NII. Though interest rates are likely to be cut down, the expected decline in deposit costs, decent loan demand and exposure to non-interest-bearing deposits will likely boost NII in the upcoming period. Management estimates NII growth between 2% and 4% for the current year. We estimate NII to increase 2.3%, 2.9% and 3.2% in 2024, 2025 and 2026, respectively.
Cullen/Frost has been enhancing its presence in the lucrative Texas markets. In June 2023, the company announced plans to double its financial centers to 34 in the Austin region by 2026. Management opened the first few centers in 2023. It expects to open another 17 branches in the region by 2024. In 2021, Cullen/Frost completed its 25-branch expansion program in the Houston region.
Capitalizing on the success of its footprint growth in Houston, the company planned a similar 28-branch expansion in Dallas. By 2023 end, the Dallas branch expansion reached its two-third mark. Given the pro-business and a low-tax scenario, along with compelling customer demographics in the region, such efforts are apt, and will likely drive deposit and loan growth for Cullen/Frost in the upcoming period.
However, Cullen/Frost’s escalating expenses expose it to operational risks. Non-interest expenses witnessed a CAGR of 9.5% over the last five years (2018-2023). This was primarily due to an increase in salaries and wages, net occupancy, and technology, furniture and equipment expenditure. Going forward, expenses are likely to remain elevated on expansion moves in the Texas region.
Management expects non-interest expenses of 6-8% for 2024. We estimate non-interest expenses to see a CAGR of 4.3% over the next three years (ended 2026).
Cullen/Frost’s credit quality seems to have worsened over the years. The allowance for credit losses on loans as a percentage of total loans increased to 1.33% in 2022 from 1.28% in 2016. Though the ratio declined to 1.31% in 2023, it remains high. Also, the ratio of net charge-offs to total average loans stood at 0.09% in 2022 and reached 0.19% in 2023. Further, credit loss expenses increased to $46.2 million in 2023 from $3 million in 2022. Going forward, any economic slowdown is likely to adversely impact the company’s credit quality.
The majority of Cullen/Frost's loan portfolio comprises commercial loans (including commercial and industrial, as well as commercial real estate loans). Notably, its loan mix underpinned 79.4% of commercial loans as of Dec 31, 2023. The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 4.2% compared with the industry's 4% rise.
Image Source: Zacks Investment Research
Stocks to Consider
A couple of better-ranked stocks from the banking space are JPMorgan Chase & Co. (JPM - Free Report) and Park National Corporation (PRK - Free Report) . Both JPM and PRK currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JPM’s earnings estimates for 2024 have moved marginally upward over the past 30 days. In the past year, its shares have risen 31.9%.
The Zacks Consensus Estimate for PRK’s current-year earnings has moved north 3.7% over the past 30 days. Its shares have risen 1.2% in the past year.