On Monday, Citi issued an update on Cullen/Frost Bankers (NYSE:CFR), reducing the price target to $104 from $107, while keeping a Sell rating on the stock. The adjustment reflects a more cautious outlook ahead of the company's third-quarter earnings.
The firm is updating its model for the Texas-based bank, noting that their earnings per share (EPS) estimates for 2024 and 2025 remain below the consensus. This outlook is attributed to an expected increase in expenses due to the expansion of branches across Texas, coupled with limited net interest margin (NIM) expansion in a lower interest rate environment.
Citi's revised model now assumes a net interest margin of 3.00%, a decrease from the previously projected 3.50%, by the third quarter of 2025. The firm also anticipates that Cullen/Frost's strong credit culture may lead to softer loan growth in a more competitive lending environment, which is expected when interest rates are lower.
"We maintain our Sell rating given our assumption of downside EPS revision and already above-peer valuation," said the analysts.
The slight reduction in the price target to $104 factors in a 9.5% cost of equity and a 17.0% normalized return on tangible common equity (ROTCE).
In other recent news, Cullen/Frost Bankers reported mixed second-quarter earnings, with a decrease from $160.4 million to $143.8 million year-over-year. Despite a slight decline in average total deposits to $40.5 billion, the bank experienced robust loan growth of over 11%, reaching $19.7 billion. This growth was attributed to strategic expansions in key Texas cities, which have resulted in significant gains in deposits, loans, and new households.
Morgan Stanley recently downgraded Cullen/Frost from Equalweight to Underweight, citing concerns about the bank's current valuation and interest rate sensitivity. Despite the downgrade, the firm raised its price target on the company's shares to $121.00 from the previous target of $112.00.
RBC Capital, on the other hand, adjusted its outlook on Cullen/Frost's shares, raising the price target to $120 from $119, while maintaining a Sector Perform rating. The firm emphasized the bank's strong second-quarter earnings, driven by continued loan growth, an improving margin, and controlled expenses.
InvestingPro Insights
Adding to Citi's analysis, recent data from InvestingPro provides additional context for Cullen/Frost Bankers' financial position. The company's P/E ratio stands at 13.58, suggesting a relatively modest valuation compared to some peers in the banking sector. This could be seen as somewhat at odds with Citi's view that the bank's valuation is above its peers, highlighting the complexity of valuation metrics in the current market.
InvestingPro Tips reveal that Cullen/Frost has raised its dividend for 31 consecutive years, demonstrating a strong commitment to shareholder returns. This consistent dividend growth, coupled with a current dividend yield of 3.42%, may appeal to income-focused investors despite Citi's cautious stance.
The company's revenue growth of 0.76% over the last twelve months aligns with Citi's concerns about potential softer loan growth in a competitive environment. However, Cullen/Frost's operating income margin of 37.6% indicates efficient operations, which could help mitigate some of the expense pressures Citi anticipates from branch expansion.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights that could provide a fuller picture of Cullen/Frost's financial health and prospects.
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