Commerce Bancshares (CBSH) Rides on Loans, Asset Quality Ails
Commerce Bancshares, Inc. CBSH is well-positioned for revenue growth, aided by the moderate rise in loan demand and its efforts to strengthen non-interest income. However, a steady rise in operating expenses and weak asset quality are major headwinds.
The company’s growth strategy is driven by organic expansion efforts. Though revenues declined in 2020, the same witnessed a five-year CAGR of 4.5% (ended 2022). The upside mainly stemmed from solid loan balances (which recorded a CAGR of 3.6% over the last four years), along with the strength of fee income sources. Decent loan demand and solid non-interest income performance are likely to keep driving top-line growth. Our estimates for revenues suggest a CAGR of 2% over the next three years.
Supported by higher interest rates, Commerce Bancshares’ net yield on interest-earning assets is expected to keep improving in the quarters ahead. However, rising funding costs will weigh on it to some extent. Last year, the metric expanded to 2.85% from 2.58% in 2021. The momentum continued in the first six months of 2023. We expect the metric to be 3.08% in 2023.
As of Jun 30, 2023, CBSH had total debt of $3.88 billion, and cash and due from banks and interest-earning deposits with banks of $2.94 billion. It maintains investment-grade ratings of A- and a stable outlook from Standard & Poor’s. This renders the company favorable access to the debt market. Despite having a high debt burden, the company’s earnings strength implies that it will be able to meet debt obligations, even if the economic situation worsens.
However, Commerce Bancshares has been witnessing a persistent rise in non-interest expenses. Expenses witnessed a CAGR of 2.7% over the last five years ended 2022, with the uptrend persisting in the first six months of 2023. Overall expenses are expected to remain elevated as the company invests in technology upgrades amid inflationary pressure. Our estimates for non-interest expenses suggest a CAGR of 4.1% by 2025.
CBSH’s asset quality has been deteriorating over the past few years. While Commerce Bancshares recorded a provision benefit in 2021, a substantial rise in provisions for credit losses was witnessed in 2020 and 2022 as the company continued to build reserves to combat the tough operating environment. The uptrend in the metric continued in the first half of 2023.
The worsening macroeconomic outlook amid recessionary fears is expected to keep provisions high in the near term. We expect provisions for credit losses to surge 58.6% this year.
Shares of this Zacks Rank #3 (Hold) company have dropped 23.8% over the past six months compared with the industry's decline of 21.9%.
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Banks to Consider
A couple of better-ranked stocks from the banking space are Live Oak Bancshares, Inc. LOB and The Bancorp TBBK.
Live Oak Bancshares currently sports a Zacks Rank #1 (Strong Buy). Estimates for 2023 earnings have been revised 19.7% upward over the past 30 days. In the past six months, LOB shares have declined 1.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Estimates for The Bancorp’s earnings have been revised 1.4% north for 2023 over the past 30 days. Shares of TBBK have rallied 3.5% in the past six months. Currently, the company carries a Zacks Rank #2 (Buy).
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