Robust Loans, Higher Rates to Aid BankUnited (BKU), Costs Ail
BankUnited, Inc. BKU is poised for top-line growth, supported by higher interest rates, a robust loan balance and focus on strengthening fee income. 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.
Thus, analysts are not very optimistic regarding its earnings growth potential. Over the past 30 days, the Zacks Consensus Estimate for BKU’s 2023 earnings has been revised 5.9% lower. Thus, BankUnited currently carries a Zacks Rank #3 (Hold).
Over the past six months, shares of the company have lost 26.4% compared with the industry’s decline of 12.6%.
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Looking at its fundamentals, while the company's revenues declined in 2020, the same increased in 2021 and 2022, with the uptrend continuing in the first half of 2023. With decent growth in loans and the company's efforts to improve fee income, its top line is expected to keep improving.
BankUnited has been changing its deposit mix to further aid revenues. Management has been strategizing on increasing low-cost deposits, which will likely provide support to revenue growth. Though we project total revenues to decline 3% this year, it will rebound and grow 1.6% in 2024 and 4.1% in 2025.
BKU’s net interest margin (NIM) has been under pressure over the past several years because of lower interest rates. However, NIM increased to 2.68% in 2022 (on higher rates) from 2.38% in 2021 and 2.35% in 2020. With the Federal Reserve expected to keep interest rates high in the near term, the company’s NIM is likely to be positively impacted, though the pace of increase might slow down.
BankUnited’s earnings strength is expected to help it sustain efficient capital deployment activities in the future. For the first time, the company 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. Also, it has a share repurchase program in place. As of Jun 30, 2023, $20.2 million worth of shares were left to be repurchased.
However, the company’s expenses have increased in 2021 and 2022, with the upward trend continuing in the first six months of 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 compound annual growth rate (CAGR) of 5.7% 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 three 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 and the first six months of 2023, the company recorded increased provisions on a deteriorating macroeconomic outlook. We anticipate provision for credit losses to increase 16.2% in 2023.
Stocks to Consider
A couple of better-ranked stocks from the finance space are T. Rowe Price Group, Inc. TROW and SEI Investments Company SEIC.
T. Rowe Price currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 8.1% upward over the past 60 days. In the past three months, TROW shares have gained 2.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for SEI Investments have been revised 3.8% upward for 2023 over the past 60 days. Shares of SEIC have rallied 6% in the past three months. Currently, the company carries a Zacks Rank #2 (Buy).
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