UBSI - United Bankshares: A Hold As We Wait For Better Prices

2023-08-17 07:11:05 ET

Summary

• United Bankshares offers a dividend yield of 4.3% and a decent ROE of 8.6%.
• UBSI has a solid portfolio of loans and continues to grow its interest and fee income.
• Despite the challenges in the regional bank industry, UBSI has shown resilience and consistent growth.

Introduction

As many regional banks lost their footing in terms of share price as we had some of the largest institutions in the industry go under there seems to remain some decent opportunities in the market still. The most appealing part of United Bankshares ( UBSI ) remains to be the dividend yield at 4.3%, supported by a decent ROE of 8.6%, which is the highest the company has had in the last 5 years.

Looking more at the p/e though it seems that UBSI continues to trade rather high with a premium of around 25% to the rest of the sector. Despite the downturn in the stock price and lack of recovery for it, I think the market is accounting for more risk right now with regional banks. This leaves me with a lack of incentive to start a position in the company, but I do realize there is still potential in just collecting the dividend and perhaps adding more if the share price continues down. Rating UBSI stock a hold as of now.

Company Structure

UBSI has been in operation since 1982 and has built up a solid portfolio of loans and continued to grow its interest and fee income very impressively. In the second quarter of 2023, that number reached $345 million, an increase of 51% YoY. In terms of how this trickled down to net income, it was $92 million for the second quarter of 2023.

As I have mentioned already the industry that UBSI operates in is the regional bank one. An industry that has been plagued with turmoil in 2023 as two major banks went under. This had a ripple effect on the industry as many companies' share prices saw their value cut. However, it remains impressive that UBSI has kept up the momentum and continues posting QoQ growth, indicating they had little exposure to the whole ordeal.

UBSI is made up of two different segments which are Community Banking and Mortgage Banking. The company engages in savings services, and individual retirement accounts but also commercial loans and leases.

A key highlight of the company is the solid efficiency ratio of its operations, which sits just above 50%. Seeing this number remain both stable and decreasing on a year-over-year basis is reassuring to my hold thesis.

As the Fed in the United States has been mostly raising the interest rates consistently over the past year at least, the NII for UBSI has been growing. The company now has its net loans at an average yield approaching 6%. In terms of the securities portfolio of the business, 26% of it is on a floating rate and the securities balance is listed at $290 million at an average yield of 2.5%. These are projected to roll off over the remaining part of 2023 and an additional $895 million at a rate of 2.8% in 2024. This highlights the fact that UBSI is likely to remain consistent in growing its NII over the coming several quarters.

Fundamentals

Looking at the fundamentals of the business I think it remains very solid as, despite a decreasing amount of deposits, the earnings that UBSI is extracting are increasing. This showcases reliability in times of difficult market conditions and provides proof as to why UBSI has such a solid long-term outlook still.

Diving deeper into the deposit summary we can see that the interest-bearing transactions are growing at a decent rate year over year. Right now sitting at a value of $5.2 billion, making up 23.4% of the total deposits. That seems to indicate that UBSI still will see solid activity going forward and that higher interest rates aren't hurting consumers and clients that harshly yet.

Valuation & Comparison

Looking at the model above here I think it's easy to conclude that UBSI doesn't offer as good of a price point as one would have hoped. The target price for 2023 is $18.2, well below where UBSI currently trades. The reason for the low target is that the dividend is not growing that quickly. Much because the company already has a rather larger payout ratio of over 49%. I think you would be missing out on potential returns by investing right now. However, if you already have a position, it doesn't make sense to stick around and collect the over 4% yield it offers.

Risk Associated

Navigating the realm of investments requires a keen understanding of the inherent risks and potential rewards that different asset classes bring to the table. Real estate investments, while often holding the allure of higher yields as property values appreciate, also come with their fair share of complexities and vulnerabilities.

Real estate investments, due to their nature tied to physical assets, can introduce a unique set of risks into one's investment portfolio. These risks span from market fluctuations and property-specific challenges to regulatory changes and macroeconomic factors that can impact property values and rental income streams. Investors need to recognize that the value of real estate assets can be influenced by a wide range of variables, making them subject to potentially significant shifts.

Investor Takeaway

UBSI has built up a solid asset base and despite deposits decreasing on a YoY basis, the NII the company generates continues to grow supported by higher interest rates. The company has seen a decline in the share price as most regional banks did during the spring of this year. However, it remains above where I’d be comfortable buying it and will instead be having UBSI as a hold rating, awaiting better entry prices.

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