Loan Growth to Aid Commerce Bancshares (CBSH) Amid Cost Woes
Commerce Bancshares, Inc. CBSH is expected to witness growth in the top line, supported by the decent rise in loan demand, along with the company’s efforts to grow fee income. Given its earnings strength, CBSH will likely be able to sustain the current capital distributions in the future, thereby enhancing shareholder value.
Analysts seem optimistic regarding the company’s earnings growth potential. Over the past 60 days, the Zacks Consensus Estimate for its 2023 earnings has been revised 1.4% upward.
However, given the current tough economic backdrop, the company's asset quality is expected to remain under pressure in the near term. Also, elevated expenses might hurt bottom-line growth. Thus, CBSH currently carries a Zacks Rank #3 (Hold).
Shares of the company have gained 5.7% over the past six months compared with the industry’s growth of 8%.
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Looking at its fundamentals, Commerce Bancshares’ revenues have witnessed a five-year (2017-2022) compound annual growth rate (CAGR) of 4.5%, with the uptrend continuing in the first nine months of 2023. The increase was primarily driven by solid loan demand and strength in fee income sources.
The company’s net loans saw a CAGR of 3.6% over the four-year period ended 2022, with the upward trend continuing in the first nine months of 2023.
Decent growth in loans and solid non-interest income performance will likely keep driving the company’s top-line growth. For 2023, we estimate total revenues to grow 4.7% and loan balances to rise 4.4%.
While rising funding costs will put some pressure on Commerce Bancshares’ net yield on interest-earning assets, the metric is expected to improve in the near term to some extent, given the current high interest rate environment.
Supported by higher rates, net yield on interest-earning assets expanded to 2.85% in 2022 from 2.58% in 2021. The upward momentum continued in the first nine months of 2023. We expect the metric to be 3.06% in 2023.
However, the company’s non-interest expenses have witnessed a CAGR of 2.7% over the last six years ended 2022, with the uptrend continuing in the first nine months of 2023. The rise was mainly due to higher salaries and employee benefit costs.
Overall costs are expected to remain elevated as CBSH invests in technology upgrades amid inflationary pressure. We expect total expenses to rise 8.2%, 7.7% and 3.7% in 2023, 2024 and 2025, respectively.
Commerce Bancshares' asset quality has been deteriorating over the past few years. While the company recorded a provision benefit in 2021, a substantial rise in provisions was witnessed in 2022 and the first nine months of 2023, as the company had built reserves to combat the tough operating environment. The worsening macroeconomic outlook is expected to keep provisions high in the near term. We expect provision for credit losses to surge 71.5% this year.
Further, Commerce Bancshares has significant exposure to revolving home equity and real estate loans. As of Sep 30, 2023, the company’s exposure to these loan portfolios was 49.7% of total loans. Though there has been an improvement in the housing sector, any deterioration in real estate prices will pose a problem.
Stocks to Consider
A couple of better-ranked stocks from the finance space are Prospect Capital Corporation PSEC and Horizon Technology Finance Corporation HRZN.
Earnings estimates for PSEC have been revised 8.1% upward for the current fiscal year over the past 60 days. The company’s share price has decreased 6% over the past three months. PSEC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Horizon Technology also flaunts a Zacks Rank of 1 at present. Its earnings estimates have been revised upward by 7.6% for the current year over the past 60 days. In the past three months, HRZN’s share price has increased 7.4%.
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Commerce Bancshares, Inc. (CBSH) : Free Stock Analysis Report
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