On Jun 25, we issued an updated research report on UMB Financial Corporation (UMBF - Free Report) . While the bank has a record of elevated expenses, its revenue performance and improving efficiency level, backed by rising loans and deposit balance, will not disappoint investors. However, lack of diversification in loan portfolio is a concern.
Looking at the fundamentals, UMB Financial has a diverse revenue base, which is likely to aid its earnings growth. With robust capital levels, the company might undertake opportunistic expansions in the future. Also, capital strength supports the company’s plan to invest in technology, which might drive its operating leverage in the near term.
Additionally, the company has been focused on diversifying operations to non-interest sources of revenues in order to reduce exposure to interest rates to balance the unprecedented risks related to the rate environment. For the five-year period ended 2019, the company’s fee income witnessed a CAGR of 3.6%, with some annual volatility. Though fee income declined in the first three months of 2020, the growing popularity of HSAs is likely to help boost income for its healthcare services segment in the near term.
In the last four years (ended 2018), UMB Financial’s net interest margin (NIM) benefited largely from increase in earning assets yields. Further, the company’s low-cost deposit base and relatively higher interest rates bolstered margins. Moreover, UMB Financial’s increasing NIM has favorably impacted the net interest income (NII), which witnessed a compound annual growth rate (CAGR) of 13% over the last five years (ended 2019). While the NIM decreased in 2019 and first-quarter 2020 on a lower rate environment, an improving lending scenario is expected to benefit interest income in the quarters ahead.
UMB Financial’s capital-deployment activities are impressive. The company has been raising dividends on a regular basis. The latest hike of 3.3% was announced in October 2019. Also, the bank has a share-repurchase plan in place. This April, the company announced a share-repurchase authorization of up to 2 million shares.
Nonetheless, persistently rising non-interest expenses is a major concern. The company’s non-interest expenses have witnessed a CAGR of 5.1% over the last five years (2015-2019). Though costs declined slightly in first-quarter 2020, the same are likely to remain elevated due to the company’s investments in newer technologies and building distribution networks. Moreover, high exposure to commercial loans reflects lack of diversification, which can be risky for the company amid a challenging economy and competitive markets.
The company has gained 8.3% in the past three months compared with 4.2% growth recorded by the industry.
Furthermore, its earnings estimates have been unrevised, for the current and next year, over the past seven days. Hence, the stock carries a Zacks Rank #3 (Hold), at present.
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