2023-06-07 06:01:43 ET
Summary
- Customers Bancorp stock has rallied over 50% in the past month, outperforming its peers and the regional banking ETF.
- The rally is attributed to strong risk management and conservative positioning by CUBI during the regional banking crisis.
- Despite a longer-term downtrend, the company's undervaluation and post-PPP growth potential make it a relatively safe investment below $30 per share.
Customers Bancorp ( CUBI ) is up more than 50% in the past one month. This follows a brief period of relative underperformance triggered by the regional banking crisis that engulfed markets in March, resulting in a steep sell-off in US regional banking stocks. However, if you ignore the recent rally and zoom out on CUBI's stock chart over the past five years, a different picture emerges: CUBI is on a longer-term downtrend after peaking at around $70/share in the first week of 2022. Given the longer-term historical trend, some degree of healthy skepticism is prudent when thinking about a potential long position in CUBI.
CUBI market cap over past 5 years (Seeking Alpha)
As the chart above shows, CUBI's market cap has been steadily declining over the past 4 quarters, falling by more than 60% from around $2 billion in Q4 2021 to the current $812 million (as of writing). While the recent rally is encouraging, the historical trend in terms of price performance is a red flag that must not be lightly ignored. Investors consequently need to consider several factors before making long-term bets on this regional bank's apparent recovery.
The first factor worth looking at is whether the bank's recent rally is attributable to the fact that the panic over regional banks is subsiding. Indeed, many regional banking stocks have posted strong returns in the past 1 month as the market's fears over the regional banking crisis wane.
Tellingly, the regional banking ETF ( KRE ), which has 144 holdings, is up 10% over this period. CUBI, by comparison, is up 50%. The Eastern Pennsylvania based lender's outperformance is even more pronounced when you compare it with its peer set, which consists of similarly sized regional banks in terms of market cap, number of staff and other relevant metrics tracked by SA's peer comparison tool . Peers include Tompkins Financial Corporation ( TMP ), Brookline Bancorp ( BRKL ), Peoples Bancorp ( PEBO ), Bank First Corporation ( BFC ) and Capitol Federal Financial ( CFFN ).
CUBI significantly outperformed peers in past 1 month (Seeking Alpha)
As the chart illustrates, CUBI has been the clear favorite among peers in the past month, suggesting that investors could be seeing a longer-term opportunity beyond the fact that the stock was oversold in the wake of the banking crisis.
Strong risk management rewarded
In my opinion, CUBI's recent price action is a reflection of the fact that investors have renewed confidence in the effectiveness of the management's strong risk management culture. Thanks this, CUBI was able to expertly navigate the Q1 regional banking crisis. In its Q1 earnings release , CUBI disclosed that it was able to grow deposits (when many regional banks were losing deposits), maintain high asset quality (by growing proportion of commercial vs consumer loans), and contain non-performing loans.
A few highlights from the quarter ended March 31 worth highlighting include:
- Total commercial loans of $11.33 billion vs total consumer loans of $1.80 billion (hence high asset quality)
- Non-performing loans to total loans and leases of just 0.21%
- Reserves to NPLs of 405.56%
- Consumer portfolio with following customer characteristics: average original FICO score of 737, average debt-to-income of 20% and average borrower income of $106K
- Q1 2023 non-interest-bearing deposits grew by $1.6 billion, or 85%, over Q4 2022, leading to a March 31, 2023, spot cost of deposits decline of 14 basis points
- Total insured deposits were 81% of total deposits, with immediately available liquidity covering uninsured deposits by 272%
In summary, CUBI came out of the turmoil stronger and better capitalized. The bank further disclosed that its capital ratios were stable and above regulatory requirements, with the CEO and Chairman, Jay Sidhu, noting that the plan was to continue strengthening its capital position. Even though CUBI remains well capitalized by all regulatory measures, its goal is to increase its CET 1 ratio at year-end 2023 to be between 11.0% - 11.5%, up about 150 basis points over current levels. "It is prudent to moderate or even shrink our balance sheet in this uncertain environment and have strong capital ratios," stated Jay in the release.
Investors are rewarding CUBI for playing strong defense in Q1, hence the strong rally in recent weeks. The key question is whether the momentum will be enough to reverse the longer-term downtrend in CUBI's stock. To answer this, we need to look at the key reason why the stock has been declining in the past couple of quarters.
Getting past The PPP hangover
CUBI was a huge beneficiary of the Paycheck Protection Program ((PPP)), the Trump-era Small Business Administration (SBA) backed loan that helped US businesses keep their workforce employed during the COVID-19 crisis. The SBA worked with banks to channel these funds to American businesses that qualified for assistance. In exchange, the partner banks made money from fees on the transactions. In its recent SEC filings, CUBI notes that: "We funded, either directly or indirectly, about 358,000 loans totaling $10.3 billion. Through the program, we earned close to $350 million of deferred origination fees from the SBA, which was significantly accretive to our earnings and capital levels as these loans were forgiven or guaranteed by the government."
The impact of PPP on CUBI's earnings was phenomenal. It resulted in a one-off bump in net income and earnings per share, propelling its share price to as high as $70 per share in Dec 2021 from lows of around $10 in September 2020. However, every great party must come to an end, and when it does, the music stops, and the hangover follows. With Covid in the rearview mirror, PPP is obviously no longer a catalyst for CUBI. The impact for CUBI is that its net income and EPS have normalized in the past year. The bank reported EPS of $6.68 in December 2022, after having increased this all-important performance metric from $4.09 in 2020 to $10.51 in 2021 in large part because of the impact of PPP. Analysts estimate that 2023 EPS will come in at $5.87 in 2023 and $6.32 in 2024.
While CUBI's EPS is unlikely to go back to the historical high of 2021 in the near future, analysts' estimates for EPS for the current year and next year still represent a marked improvement from 3-5 years ago. Moreover, the bank's strong risk management culture and conservative positioning is a viable strategy given the risk of a recession and the need for lenders to be conservative in this macroeconomic environment. I therefore don't see the slower growth post-PPP as a key risk now as much of this is already priced into the stock after it fell in half in 2022. The hangover is over.
Valuation offers relative safety
Looking at its valuation, CUBI is a relatively undervalued stock while trading below $30 per share. Below $20 per share, as was the case for part of March, all of April and part of May, it was in deep bargain territory. Its current P/E of 4.25x is 36.74% lower than its 5-year average. Even with EPS moderating (relative to the Covid period) in coming years, CUBI's current undervaluation relative to historical multiples suggest some reasonable upside. Tellingly, CUBI's tangible book value per share is $40.96 per share, which is more than 30% above its last closing price at the time of writing. Its price/book for the past five years has averaged 0.93 vs the current 0.62, underlining the undervaluation. In my view, it is a safe buy below $30 and still has meaningful upside potential.
For further details see:
Customers Bancorp: Strong Risk Management Culture And Undervaluation Make It A Buy