Higher Rates Likely to Aid BankUnited (BKU) Amid Cost Woes
Higher interest rates, along with BankUnited, Inc.’s BKU robust loan balance and focus on fee income, will likely continue to aid revenues. Based on its earnings strength, the company’s capital deployment activities look sustainable.
However, inflationary pressure and technological upgrades are expected to keep operating expenses elevated. Worsening asset quality and exposure to risky loan portfolios are other headwinds.
Over the past 30 days, the Zacks Consensus Estimate for the company’s 2023 earnings has been revised 2% lower, reflecting that analysts are not that optimistic regarding its earnings growth potential. Thus, BankUnited currently carries a Zacks Rank #3 (Hold).
Over the past six months, shares of the company have lost 35.1% compared with the industry’s decline of 8.3%.
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Looking at fundamentals, while BankUnited's net interest margin (NIM) had been under pressure over the past several years because of lower interest rates, the metric increased to 2.68% in 2022 (on higher rates) from 2.38% in 2021 and 2.35% in 2020. The upward trend continued in the first quarter of 2023.
With the Federal Reserve expected to keep interest rates high in the near term, NIM is likely to continue to witness an uptrend, going forward.
BKU is poised to grow organically, driven by strong loans and deposit balances. While the company's revenues declined in 2020, the same saw a three-year (2020-2022) compound annual growth rate (CAGR) of 5.8%, with the uptrend continuing in first-quarter 2023.
Given the robust loan balance and the company's efforts to improve fee income, its top line is expected to keep improving. We project total net loan growth of 1.4% in 2023. Though we forecast total revenues to decline 1% this year, it will rebound and grow 2.2% in 2024 and 4.6% in 2025.
Moreover, BankUnited has been changing its deposit mix to further aid revenues. Management has been strategizing on increasing low-cost deposits, which is likely to provide further support to revenue growth. There has been an increase in non-interest-bearing demand deposits (constituting 28.6% of total deposits as of Mar 31, 2023).
The company has an impressive capital deployment plan. For the first time, it hiked its quarterly dividend by 10% to 23 cents per share in February 2020 and by 8.7% to 25 cents per share in March 2022. It again hiked the dividend by 8% in February 2023.
Further, BankUnited has a share repurchase program in place. As of Mar 31, 2023, $20.2 million worth of shares were left to be repurchased. Its earnings strength is expected to help it sustain efficient capital deployment activities in the future.
However, the company’s expenses saw a CAGR of 8.7% for the three years ended 2022. The upward trend persisted in first-quarter 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 be elevated due to its continued investments in technological upgrades and inflationary pressure. We project total non-interest expenses to witness a CAGR of 8.1% 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 four years ended 2020. While the company recorded negative provisions in 2021, a substantial jump in provisions was recorded in 2020 as the company built reserves to combat the coronavirus-related economic slowdown.
Likewise, in 2022, the company recorded an increase in provisions on a deteriorating macroeconomic outlook. The uptrend is expected to continue in the near term, given the risk of a recession. We anticipate provision for credit losses to jump 49.8% year over year in 2023.
Stocks to Consider
A couple of better-ranked stocks from the finance space are Federated Hermes, Inc. FHI and Artisan Partners Asset Management Inc. APAM, currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for FHI have been revised 1.5% upward for 2023 over the past 60 days. The company’s share price has declined 10.3% over the past three months.
Artisan Partners’ earnings estimates have been revised upward by 3.4% for the current year over the past 60 days. In the last three months, APAM’s share price rose 24.8%.
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