BankUnited (BKU) Aided by Robust Loans, Asset Quality Stays Weak
BankUnited, Inc. BKU is poised for top-line growth, supported by higher interest rates, a robust loan balance and a focus on strengthening fee income. However, elevated operating expenses, worsening asset quality and huge mortgage loan exposure are headwinds.
Looking at its fundamentals, while the company's revenues declined in 2020, the metric recorded a CAGR of 3.2% over three years ended 2022. The uptrend continued in the first nine months of 2023. With decent growth in loans and the company's efforts to improve fee income, its top line is expected to keep improving.
BankUnited has been changing its deposit mix to further support revenues. As of Sep 30, 2023, non-interest-bearing demand deposits constituted 28.1% of total deposits. Though we project total revenues to decline 2.3% this year, it will rebound and grow 2% in 2024 and 2.5% in 2025. We project total net loans to grow 1.6% in 2023.
BKU’s net interest margin (NIM) is getting support from higher interest rates, while a rise in funding costs is expected to weigh on the metric to some extent. Management projects NIM to improve modestly in the upcoming quarters as funding costs have stabilized. We expect NIM to be 2.56%, 2.65% and 2.72% in 2023, 2024 and 2025, respectively.
BankUnited’s earnings strength is expected to help it sustain efficient capital distribution activities in the future. For the first time, the company hiked its quarterly dividend by 10% to 23 cents per share in February 2020 and by 8.7% to 25 cents in March 2022. It again hiked the dividend by 8% in February 2023. Also, it has a share repurchase program in place. As of Sep 30, 2023, $20.2 million worth of shares were left to be repurchased.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have jumped 38.7%, outperforming the industry’s rise of 4.3%.
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BKU’s expenses have witnessed a three-year CAGR of 3.5% (2019-2022), while the metric declined in 2020 due to the absence of amortization of FDIC indemnification assets. The upward trend persisted in the first nine months of 2023. The increase was mainly due to a rise in employee compensation and benefits costs, deposit insurance expenses and professional fees. BankUnited’s overall costs are likely to remain elevated due to its continued investments in technological upgrades and inflationary pressure. We project total non-interest expenses to witness a CAGR of 5.8% by 2025.
BKU’s asset quality has been deteriorating over the past few years. Provision for credit losses witnessed a CAGR of 37.4% over the three years ended 2020. While it recorded negative provisions in 2021, a jump in provisions was witnessed in 2022 and the first nine months of 2023 on a deteriorating macroeconomic outlook. The uptrend is expected to continue in the near term, given the risk of an economic slowdown. We anticipate provision for credit losses to increase 27.8% in 2023.
Stocks to Consider
A couple of better-ranked stocks from the banking space are First Citizens BancShares, Inc. FCNCA and Fifth Third Bancorp FITB.
First Citizens BancShares currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 3.7% upward over the past 30 days. In the past six months, FCNCA shares have gained 28.7%. You can see the complete list of today's Zacks #1 Rank stocks here.
Earnings estimates for Fifth Third Bancorp have been revised 2.7% upward for 2023 over the past 30 days. Shares of FITB have rallied 6.1% in the past six months. Currently, the company carries a Zacks Rank #2 (Buy).
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