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Why Hold Strategy is Apt for Prosperity Bancshares (PB) Now

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On Dec 4, we issued an updated research report on Prosperity Bancshares (PB - Free Report) . The company has been benefiting from growth in loan and deposit balances along with steady improvement in asset quality. However, elevated operating expenses and margin pressure owing to a liability sensitive balance sheet remain near-term concerns for this Zacks Rank #3 (Hold) company.

Prosperity Bancshares’ earnings estimates for 2017 have been revised upward by one cent per share in the last 60 days.

The stock has gained 2.8% in a year’s time, underperforming the industry’s growth of 8.3%.

The company exhibits strong organic growth prospects. Its net revenues have been reflecting an increasing trend with a six-year (2011-2016) CAGR of 14.4%, mainly driven by acquisitions. Though net revenues declined marginally in 2016 and so far in 2017, the company expects some improvement on this front in the upcoming quarters, on continued loan demand.

Also, improving credit quality remains a positive for Prosperity Bancshares, with a decrease in net charge-off rates and allowance for credit losses to total loans ratio over the last few years. Though asset quality deteriorated in 2016 due to a stressed energy portfolio, a rebound in oil prices and improving economic conditions will continue to lead to an improvement in the same in the quarters ahead.

However, elevated operating expenses remain a major headwind for Prosperity Bancshares. Non-interest expenses have been showing a persistent rise as evident by a four-year (2013-2016) CAGR of 8.8%, largely attributable to acquisitions completed during the period. Though the trend reversed in 2017, expenses are likely to remain on the higher side as the company continues to invest in the franchise. Prosperity Bancshares looks forward to further inorganic growth. So, merger-related charges will flare up overall expenses.

Further, the company has been facing pressure on its net interest margin (NIM) over the past few years. NIM decreased to 3.35% in 2016 from 3.38% in 2015 and 3.80% in 2014. The same trend prevails in 2017 as well. Despite Fed rate hikes and improving loan demand, margins are expected to remain under pressure due to the company’s liability-sensitive balance sheet.

Some better-ranked stocks in the finance space are Republic Bancorp , Cohen & Steers (CNS - Free Report) and Waddell & Reed Financial (WDR - Free Report) .  All these stocks carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Republic Bancorp has witnessed an upward earnings estimate revision of 4.7% for the current year, in the last 60 days. Also, its shares have gained 5.2% year to date.

Cohen & Steers’ current-year earnings estimates have been revised upward by 2.5%, in the last 60 days. Also, on a year-to-date basis, its shares have surged 33%.

Waddell & Reed Financial has witnessed an upward earnings estimate revision of 5.6% for the current year, in the last 60 days. The company’s shares have gained 8.9% year to date.

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