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Prosperity Bancshares' Elevated Expenses Pose a Concern


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On Sep 27, 2016, we issued an updated research report on Prosperity Bancshares Inc. (PB - Analyst Report) . Mounting expenses, increased dependence on real estate loans and stringent regulations will likely weigh on the company’s near-term profitability. Nonetheless, strong organic growth prospects along with continuous improvement in net interest margin (NIM) and an improving credit quality act as major positives.

Persistent increase in operating expenses remains a major headwind for Prosperity Bancshares. Non-interest expenses have grown at a CAGR of 16.5% over the past four years (2012-2015). Further, given the company’s increasing investment in its franchise, expenses are likely to remain on the higher side. Also, with the increased focus on inorganic growth prospects, merger-related charges are anticipated to further add to the overall expenses.

Moreover, the increased dependence on real estate loans also poses a serious concern. As of Jun 30, 2016, real estate loans comprised nearly 74% of its total loan portfolio. Though the housing sector is experiencing a rebound in its prices, any further deterioration will weigh on the company’s financials. In addition, the company’s exposure to the stressed energy sector loans also remains a threat in the near term.

Owing to these concerns, there is an uncertainty in the markets regarding the company’s performance. This is evident from the 2.3% decline in the company’s share price over the past month.

Analysts seem to be bearish on Prosperity Bancshares’ growth prospects as well. This is reflected in the Zacks Consensus Estimate, which declined by 0.8% to $3.94 and by 0.7% to $4.04, for 2016 and 2017, respectively, over the last 60 days.

Nonetheless, Prosperity Bancshares exhibits strong organic growth prospects and expects the loan demand to continue driving revenues in the forthcoming quarters. Also, the company’s NIM has been trending upward and an anticipated increase in loan demand and the likely rise in interest rate are further projected to boost NIM, going forward.

Currently, Prosperity Bancshares holds a Zacks Rank #4 (Sell).

Stocks Worth a Look

Some better-ranked stocks in the finance space include Nationstar Mortgage Holdings Inc. (NSM - Snapshot Report) , Apollo Global Management, LLC (APO - Snapshot Report) and Itaú Unibanco Holding S.A. (ITUB - Analyst Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nationstar Mortgage has increased 11.6% over the past 60 days, for 2016. Further, the share price of the company has surged 49.5% over the past six months.

Apollo Global’s Zacks Consensus Estimate has improved significantly over the past 60 days. In addition, over the past six months, the shares of the company have gained more than 10%.

Shares of Itaú Unibanco have climbed by more than 31% over the past six months. Further, the Zacks Consensus Estimate has increased 18.3% over the past 60 days.

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