Higher Rates Aid Commerce Bancshares (CBSH), Asset Quality Ails
Decent loan demand, fee income growth and higher rates are expected to keep supporting Commerce Bancshares, Inc. CBSH. Impressive capital distribution activities will enhance shareholder value. However, deteriorating asset quality and elevated expenses are concerns.
CBSH’s growth strategy is driven by organic expansion efforts. Though revenues took a dip in 2020, solid loan balances and strength in fee income sources led to a five-year (ended 2022) compounded annual growth rate (CAGR) of 4.5%. This momentum persisted in the first half of 2023. Decent loan demand and solid non-interest income performance will likely keep driving the company’s top-line growth. Our estimates for revenues suggest a CAGR of 2% by 2025.
With the Federal Reserve expected to keep the interest rates high in the near term, the company’s net yield on interest-earning assets is expected to keep improving in the upcoming quarters. However, rising funding costs will likely weigh on margins. In 2022, 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 3.07% in 2023.
The company has been engaging in strong capital distribution activities. It has maintained a track record of paying a 5% stock dividend for the past 28 years, with the most recent dividend announced in October 2022. Commerce Bancshares also pays regular cash dividends and has a repurchase program in place. The company is expected to be able to sustain the current capital distributions in the future, driven by its earnings strength.
Shares of the company have lost 17.5% in the past six months compared with the industry’s decline of 8.3%. CBSH currently carries a Zacks Rank #3 (Hold).
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However, persistent rise in non-interest expenses is a concern for the company. Expenses witnessed a CAGR of 2.7% over the last six years ended 2022. This increase was mainly attributed to higher salaries and employee benefit costs. The uptrend persisted in the first six months of 2023. Owing to its investments in technology upgrades amid inflationary pressure, overall expenses are expected to remain elevated. Our estimates for non-interest expenses suggest a CAGR of 4% by 2025.
Another key issue to consider is the deterioration in Commerce Bancshares’ asset quality. The company witnessed a substantial rise in provisions for credit losses in 2022 and the first half of 2023 as it continued to build reserves to fight the tough operating environment. The provisions are expected to remain high in the near term, given the worsening macroeconomic backdrop. We expect provisions for credit losses to surge 58.6% in 2023.
Bank Stocks Worth a Look
A couple of better-ranked stocks in the banking space are First Business Financial Services, Inc. FBIZ and First Financial Bancorp. FFBC.
The consensus estimate for First Business Financial Services’ current year earnings has remained unchanged in the past 30 days. In the past six months, shares of FBIZ have declined 4.9%. The stock currently carries a Zacks Rank #2 (Buy).
Over the past six months, FFBC’s share price has declined 13.2%. The consensus estimate for First Financial Bancorp’s current-year earnings has remained unchanged over the past 30 days. The company currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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