Company Reports

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

We will discontinue analyst coverage of Cullen/Frost Bankers on or about Dec. 13, 2023. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Narrow-moat-rated Cullen/Frost reported third-quarter results that outperformed expectations. The bank reported EPS of $2.38, ahead of the FactSet consensus of $2.11 and our own estimate of $2.19. Shares had been trending close to our fair value estimate through mid-July but have since traded lower, opening up a valuation gap, in our view. We do not expect a material change in our $122 per share fair value estimate. Even after the positive reaction to today’s earnings, with the stock up 8% as of this writing, we still see room for additional appreciation from here. We continue to view Cullen/Frost as one of the best-managed, lower-risk banks in our coverage.

Narrow-moat-rated Cullen/Frost Bankers reported second-quarter results that once again showed some slight pressure on earnings, but we view this pressure as quite manageable. We highlighted the bank as one of our top picks heading into the first-quarter earnings season; since then, it traded up from the lows seen in March and once again in May. Cullen/Frost was trading close to our fair value estimate going into earnings this quarter, and we thought other names presented better valuations.

Cullen/Frost is one of the smaller regional U.S. banks we cover, and it focuses exclusively on the Texas market. The bank is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well for years to come.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Narrow-moat-rated Cullen/Frost Bankers reported first-quarter results that show some slight pressure on earnings, but we view the pressure as quite manageable. We highlighted the bank as one of our top picks heading into earnings season, with a unique insider buy signal, and we believe these results have vindicated that call. As we incorporate the latest results, we do not expect a material change to our $124 fair value estimate, although we may increase it slightly since near-term results are coming in better than our updated “shocked” projections from late March. Even after the April 27 stock price increase, we still see the shares as slightly undervalued.

As we look at the U.S. banks, we believe the sector is currently undervalued. However, in an effort to help investors focus their efforts, we are highlighting Comerica, U.S. Bancorp, and Citigroup—each has its own risk/reward setup.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

Cullen/Frost is one of the smaller regional U.S. banks we cover, and it focuses exclusively on the Texas market. The bank is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well in the years to come.

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

Cullen/Frost is one of the smaller regional U.S. banks we cover, and it focuses exclusively on the Texas market. The bank is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well in the years to come.

Narrow-moat-rated Cullen/Frost reported fourth-quarter earnings per share of $2.91, exceeding the FactSet consensus of $2.76, although a bit shy of our own estimate of $3.16. Revenue came in at $504 million, just below our own estimate of $509 million, while taxable equivalent revenue of $530 million was ahead of consensus. The biggest driver of the earnings beat versus consensus was indeed the higher revenue.

Cullen/Frost is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well in the years to come.

Narrow-moat Cullen/Frost reported excellent third-quarter earnings per share of $2.59, handily exceeding the FactSet consensus of $2.22, while revenue came in at $479 million, again well ahead of consensus of $435 million.

Cullen/Frost is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well in the years to come.

Narrow-moat-rated Cullen/Frost reported decent second-quarter earnings per share of $1.81, roughly in line with the FactSet consensus of $1.77, while revenue came in at $409 million, slightly ahead of consensus of $391 million. Last quarter, management highlighted that some additional expense pressure was starting to materialize, and we saw that this quarter as expenses were up 3% sequentially and 14% year over year. This was in line with our expectations, and we were already forecasting for double-digit year-over-year growth for the rest of the year. Trust and investment fees started to show a bit of weakness sequentially, a common pattern throughout the industry; however, most other fee line items were holding up well in the quarter. As a reminder, there will be some slightly additional pressure from the elimination of OD/NSF fees in the second half of the year.

Cullen/Frost is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base. The bank's sweet spot is small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will continue to serve it well in the years to come.