2023-08-23 18:01:38 ET
Summary
- Valuation multiples are quite low compared to peers and historical averages.
- The bank's deposits are stable and well-insured, providing reassurance to depositors.
- The bank's loan portfolio and securities portfolio are well-positioned for future performance, with low exposure to office CRE and retail CRE.
Just a few months ago Customers Bancorp ( CUBI ) was trading at $17 per share, about half of what it is valued by the market today. The pessimism caused by the banking crisis in the wake of SVB's failure is now behind us, and financial markets are predicting a soft-landing scenario and no longer a recession.
All this has boosted confidence in cyclical businesses such as banking, but not all banks have performed equally in recent months.
Customers Bancorp has been among the best performers, yet taking a look at its valuation on Seeking Alpha it still seems undervalued given its low valuation multiples compared to both peers and historical averages.
Based on data from the latest quarterly report , I will lay out my bullish thesis toward this bank.
Deposits and net interest margin
Customers Bancorp's deposits are stable and growing over the long term, but the current average cost of deposits is at 3.11% and is quite high when compared to peers. In itself, this is a negative aspect, but since the yield on assets is also high, this has prevented a significant drop in NIM.
In any case, compared to the previous quarter, this cost has decreased by 21 basis points, an important improvement considering the current macroeconomic environment in which all banks are struggling to stabilize the cost of their deposits.
As for the safety of these deposits, as much as 77% is insured - one of the highest values among regional banks competing with Customers Bancorp.
What is more, the liquidity available is considerably higher than uninsured deposits, which makes the soundness of this bank reassuring even those with deposits in excess of $250,000. In other words, even though expensive, Customers Bancorp's deposits are well-covered and resilient over time.
As anticipated, the sharp rise in interest rates caused a subsequent rise in the cost of deposits. The latter, rising faster than the yield on assets, triggered the decline of NIM until Q4 2022. Anyway, the trend seems to have reversed, and for the second consecutive quarter the NIM has improved and is expected to be between 2.85% and 3.05% for the full year 2023. Much more likely to be near the upper end of the range.
Finally, regarding any sharp rise or fall in the Fed Funds Rate, net interest income is expected to increase only in the former case.
Loans and investment portfolio
Seventy percent of the loan portfolio is at floating rates, which is why net interest income is expected to fall if there is a major and sudden drop in interest rates. In addition, the loan-to-deposit ratio is only 77%, which makes Customers Bancorp's financial structure quite flexible. Cash on hand is high, which will allow it to take advantage of new opportunities at its disposal.
Customers Bancorp Q2 2023
Regarding the composition of the loan portfolio, I find it reasonable to minimize exposure to the more cyclical segments such as Office CRE and Retail CRE. In the event of a recession, the latter are the ones that will get the worst of it, which would make the performance of the loan portfolio too swingy.
Compared to peers, exposure toward CRE loans (ex Multi-Family) remains small, making the loan portfolio more suitable for more risk-averse individuals.
Customers Bancorp Q2 2023
For the time being, NPLs are of no concern and I doubt that anything will change in the coming months if the soft landing scenario is confirmed. In case of a hard landing the estimates would change, but the lower exposure to CRE loans make the future of this bank more predictable.
Finally, in terms of the securities portfolio, there are a number of aspects to consider.
Customers Bancorp has an advantage over peers in terms of both duration and yield. Not only does the securities portfolio yield more, but it also has a shorter maturity. This means that the unrealized loss due to rapidly rising interest rates is more manageable and represents only 14 percent of tangible common equity.
That portfolio will generate about $400 million by year-end, and combined with more than $1 billion in loan maturities, there will be ample room for Customers Bancorp to generate new loans at favorable rates.
Valuation
As anticipated in the intro, Customers Bancorp is trading at much lower multiples than its competitors, which would seem to be an early sign of undervaluation. However, this is not enough to make Customers Bancorp a buy.
To calculate its fair value I will rely on its tangible book value.
Customers Bancorp Q2 2023
Its tangible book value has been growing steadily year after year and reached $42.04 in the last quarter. Multiplying this figure by 1.14x - or the average of the last 10 years' price to tangible book value - the fair value amounts to $47.92 per share. So, Customers Bancorp seems undervalued both on the basis of its multiples and tangible book value.
Certainly, at the current price it is not given away for free, but it might be a good time for a first purchase. However, it is not a risk-free investment.
Street estimates signal a stall in growth over the next few years, and this may be a valid reason why Customers Bancorp has such low multiples. Since the majority of its assets are floating rate, once the Fed Funds Rate is reduced, earnings will fall unless there is a change in the financial structure. In any case, should the cost of deposits fall faster than the reduction in yield on assets, the overall effect would not deteriorate the NIM.
Customers Bancorp Q2 2023
Finally, in terms of core capital requirements, Customers Bancorp is well above the minimum thresholds, which makes the bank sound. CET1 is expected to rise and could reach 11 percent by the end of 2023.
Conclusion
Customers Bancorp is a bank that suffered an irrational collapse at the beginning of the year due to negative sentiment toward the entire banking industry after the failure of several major U.S. banks. Since then, the market narrative has changed and the stocks that had lost the most have been the ones that have experienced the highest returns in recent months.
Despite a rally that at times exceeded 100 percent, this bank remains undervalued both in terms of its valuation multiples and its tangible book value. In addition, the efficiency of its securities portfolio and low exposure to CRE loans make this bank's future performance less uncertain.
Personally, I expect this rally to continue, which is why my rating is a buy, but I would like to emphasize that this is not a risk-free investment. Total assets have a strong exposure to the floating rate, and future estimates regarding EPS signal a possible stall in growth.
Last but not least, this bank does not issue dividends, which differentiates it from many peers. I do not think this is a negative aspect, but it can potentially narrow the field of investors interested in it. In this case, capital gain is all that matters.
For further details see:
Customers Bancorp: The Rally May Not Be Over Yet