High Costs Hurt Cullen/Frost (CFR), Loan Concentration Ails
Cullen/Frost Bankers, Inc. CFR is affected by mounting costs primarily due to expansion moves. This will likely impede bottom-line growth. Also, deterioration in credit quality and an undiversified loan portfolio are concerning. Nonetheless, a rise in net interest income (NII), solid loan balances and steady capital deployment plans are positives.
Cullen/Frost’s elevating cost base exposes it to operational risks. Non-interest expenses have been rising over the years. This has mainly stemmed from a rise in compensation-related expenditures.
Going forward, costs arelikely to remain elevated on expansion moves in the Texas region. Management expects expenses to rise in mid-teens for 2023. We estimate non-interest expenses to jump 13.7% this year.
The credit quality of Cullen/Frost seems to have worsened over the years. Though allowance for credit losses on loans as a percentage of total loans declined to 1.32% in the first half of 2023, it remains high.Further, the ratio of net charge-offs to total average loans increased in 2022 and reached 0.21% in the first half of 2023.
The worsening economic outlook is expected to adversely impact its credit quality. Our estimate for provision indicates a substantial surge this year.
CFR's loan portfolio comprises majorly of commercial loans (C&I as well as commercial real estate or CRE lending). In fact, its loan mix underpinned nearly 80% of CRE and C&I loans as of Jun 30, 2023.
The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of the loan category might deteriorate. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
Nonetheless, Cullen/Frost’s solid balance sheet position and NII growth offer some support to its financials. Additionally, its efforts to expand branches in the Texas region will further aid balance sheet growth. Also, steady capital deployment activitiesstoke investors’ confidence in the stock.
In the past three months, shares of this Zacks Rank #4 (Sell) company have lost 3.5% against the industry's growth of 7.9%.
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