Expansion Into Vacated Banking Markets Will Strengthen Future Market Position

Key Takeaways

• Organic growth and strategic expansion efforts in new locations and commercial relationships are supporting substantial deposit, loan, and market share increases.
  
• Investments in innovation and personnel enhance consumer business growth, promising higher future net interest income and improved earnings margins by 2026.
  
• Declining earnings per share, reduced net interest margin, rising unrealized losses, and elevated credit risks suggest potential challenges in maintaining profitability and financial stability.

Catalysts

Operates as the bank holding company for Frost Bank that provides commercial and consumer banking services in Texas.

• Cullen/Frost Bankers is continuing its organic growth strategy, which began in 2018, and is on track to open its 200th location by mid-2025, expanding its market presence and potentially driving future revenue and deposit growth.
  
• The company's strategic expansion efforts have generated significant deposit and loan growth, both exceeding their respective goals, and added a considerable number of new customer households, which is likely to bolster future revenue and earnings growth.
  
• Investments in new products, marketing, technology, and personnel are contributing to exceptional consumer business growth, with a notable increase in consumer loans and deposits, supporting future net interest income and earnings expansion.
  
• Expansion into new commercial relationships, particularly in areas vacated by larger financial institutions, indicates potential for increased loan growth and market share, which may positively impact future revenues and earnings.
  
• Cullen/Frost expects its current expansion and investments to become accretive to earnings by 2026, which could improve net margins and earnings per share as the expansion costs decrease and revenue begins to recover from these investments’ impacts.

Cullen/Frost Bankers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cullen/Frost Bankers's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.5% today to 22.7% in 3 years time.
• Analysts expect earnings to reach $523.0 million (and earnings per share of $8.37) by about April 2028, down from $569.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 12.5x today. This future PE is greater than the current PE for the US Banks industry at 10.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Cullen/Frost Bankers Future Earnings Per Share Growth

Risks

• The slight decrease in earnings per share from $9.10 in 2023 to $8.87 in 2024, despite an increase in net income for the fourth quarter, could indicate issues in maintaining earnings growth. This fluctuation in profitability might impact investor confidence in consistent earnings growth.
  
• The net interest margin declined by 3 basis points from the previous quarter signifies a reduction in profitability from interest-related activities. Lower net interest income growth could pressure overall earnings.
  
• The net unrealized loss on the available-for-sale portfolio increased significantly, suggesting potential risks in investment portfolios due to interest rate volatility, which could negatively impact financial stability and profitability.
  
• Elevated net charge-offs and the increase in problem loans suggest higher credit risk, which could lead to future loan losses, affecting net margins and earnings if the trend continues.
  
• The competitive environment for loan growth, especially with private equity and lower bank underwriting standards, may lead to pressures on credit quality and interest income, potentially affecting revenue growth and net margins.

Valuation

• The analysts have a consensus price target of $133.083 for Cullen/Frost Bankers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $164.0, and the most bearish reporting a price target of just $103.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $523.0 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $111.19, the analyst price target of $133.08 is 16.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.