Earnings of Customers Bancorp, Inc. (NYSE:CUBI) will most probably continue to dip next year but remain much higher than the pre-pandemic level. Above-average provisioning expenses and a lower average margin will pressurize earnings. On the other hand, subdued loan growth will support the bottom line. Overall, I’m expecting Customers Bancorp to report earnings of $7.61 per share for 2022, down 14.6%, and $6.94 per share for 2023, down 8.8% year-over-year. Compared to my last report on the company, I’ve slightly reduced my earnings estimates. The December 2023 target price suggests a high upside from the current market price. Therefore, I’m adopting a buy rating on Customers Bancorp.
Net Interest Margin to Fare Better in Upcoming Quarters
Customers Bancorp’s net interest margin continued to decline in the third quarter as deposit repricing outweighed asset repricing. The margin contracted by 22 basis points in the third quarter and 21 basis points in the second quarter of the year.
The outlook appears better than the last two quarters because of the management’s recent efforts. As mentioned in the earnings presentation, Customers Bancorp is currently attempting to remix its loan portfolio so that the margin can expand in 2023. As can be gleaned from the details given in the presentation, the management is focused on risk-adjusted pricing for loans. As a result, we can expect the margin to fare better in the coming quarters. However, this improvement might come at the cost of loan volume. Thanks to the management’s efforts, around 62% of earning assets were market sensitive by the end of September 2022, which was greater than the proportion of market-sensitive liabilities, as mentioned in the presentation.
The management mentioned in the conference call that it expects the margin to decline by around 10 basis points in the last quarter of 2022 before reversing its trend in 2023. Considering the factors given above and management’s guidance, I’m expecting the margin to dip by around 10 basis points in the fourth quarter of 2022 and then remain unchanged in 2023. Due to the margin decline throughout 2022, the average margin in 2023 will be much below the average for this year.
Provisioning Likely to be Slightly Above Normal
Customers Bancorp surprised me in the third quarter by reporting a large net provision reversal. The management is currently trying to shift its loan mix away from higher-risk portfolios to lower-risk portfolios. To that effect, the management has already lowered its consumer installment portfolio to 10% from 15% of loans, as mentioned in the presentation. Further, it has increased the specialty lending commercial and industrial (“C&I”) portfolio to 37% from 19% previously.
While these efforts will keep provisioning low, certain macroeconomic headwinds will boost the provisioning for expected loan losses. These headwinds include the threats of a recession and a high inflation environment that can push already financially stressed borrowers into default.
Overall, I’m expecting the net provision expense to make up 0.25% of total loans in 2023, as opposed to an average of 0.20% for the last five years.
Balance Sheet Growth to be Mixed Next Year
Customers Bancorp’s loans declined by 1.9% during the third quarter, whereas other earning assets, including securities, rose by 9.8%. The growth in securities was attributable to a moderate growth in deposits of around 3.4% quarter-on-quarter.
The management appeared quite optimistic about deposit growth in the conference call because of a strong core deposit pipeline. Moreover, the management is positive because of its technology-enabled banking platform. Customers Bancorp has exposure to digital tokens, which is one of the reasons for investors’ jitters in the market. I’m not too worried because deposits related to Customers Bank Instant Token (“CBIT”) have been stable at around $1.9 billion over the last few quarters, which makes up 10.8% of total deposits. Worse comes to worst, and all these deposits are wiped out, then Customers Bancorp can borrow to fund its assets, or liquidate some of its securities. Loans are not affected by the blockchain tokens, so earnings are not at too much risk.
The current outlook on loans is mixed. As mentioned in the earnings presentation, the C&I pipeline was strong at the end of the quarter. On the other hand, the high interest-rate environment will curb credit demand. Moreover, the management appears more focused on pricing than the volume of loans.
Overall, I’m expecting next year’s loan growth to be lower than this year’s and next year’s deposit growth to be slightly higher than this year’s growth. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21E | FY22E | FY23E |
Net Loans | 8,504 | 9,508 | 15,609 | 14,415 | 15,353 | 15,977 |
Growth of Net Loans | (0.2)% | 11.8% | 64.2% | (7.7)% | 6.5% | 4.1% |
Other Earning Assets | 711 | 1,262 | 1,905 | 4,316 | 4,240 | 4,326 |
Deposits | 7,142 | 8,649 | 11,310 | 16,778 | 17,698 | 18,416 |
Borrowings and Sub-Debt | 1,668 | 1,693 | 5,820 | 1,180 | 1,176 | 1,200 |
Common equity | 739 | 835 | 900 | 1,228 | 1,279 | 1,480 |
Book Value Per Share ($) | 22.9 | 26.4 | 28.4 | 36.5 | 38.5 | 44.5 |
Tangible BVPS ($) | 22.4 | 25.9 | 27.9 | 36.3 | 38.4 | 44.4 |
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
Expecting Earnings to Dip by 9% Next Year
The lower average net interest margin and above-average provisioning will likely pressurize earnings. Further, inflation-driven growth in non-interest expenses will hurt the bottom line. On the other hand, loan growth will support earnings. Overall, I’m expecting Customers Bancorp to report earnings of $7.61 per share for 2022, down 14.6% year-over-year. For 2023, I’m expecting earnings to decline by a further 8.8% to $6.94 per share. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21E | FY22E | FY23E |
Net interest income | 258 | 277 | 404 | 685 | 644 | 636 |
Provision for loan losses | 6 | 24 | 63 | 27 | 42 | 40 |
Non-interest income | 59 | 81 | 102 | 78 | 38 | 44 |
Non-interest expense | 220 | 232 | 267 | 294 | 304 | 327 |
Net income – Common Sh. | 57 | 65 | 119 | 300 | 253 | 231 |
EPS – Diluted ($) | 1.78 | 2.05 | 3.74 | 8.91 | 7.61 | 6.94 |
Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD million unless otherwise specified) |
In my last report on Customers Bancorp, I estimated earnings of $7.45 per share for 2022 and $7.10 per share for 2023. I have tweaked almost all income statement line items following the third quarter’s results. However, I haven’t made any big changes in any one line item. My updated earnings estimates are materially different from my previous estimates due to the cumulative effect of small changes.
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
High Price Upside Justifies a Buy Rating
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Customers Bancorp. The stock has traded at an average P/TB ratio of 0.90x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
T. Book Value per Share ($) | 22.4 | 25.9 | 27.7 | 36.3 | ||
Average Market Price ($) | 26.5 | 20.9 | 14.5 | 39.1 | ||
Historical P/TB | 1.18x | 0.81x | 0.52x | 1.08x | 0.90x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $44.4 gives a target price of $39.8 for the end of 2023. This price target implies a 41% upside from the December 23 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.70x | 0.80x | 0.90x | 1.00x | 1.10x |
TBVPS – Dec 2023 ($) | 44.4 | 44.4 | 44.4 | 44.4 | 44.4 |
Target Price ($) | 31.0 | 35.4 | 39.8 | 44.3 | 48.7 |
Market Price ($) | 28.3 | 28.3 | 28.3 | 28.3 | 28.3 |
Upside/(Downside) | 9.5% | 25.3% | 41.0% | 56.7% | 72.4% |
Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 8.3x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
Earnings per Share ($) | 1.78 | 2.05 | 3.74 | 8.91 | ||
Average Market Price ($) | 26.5 | 20.9 | 14.5 | 39.1 | ||
Historical P/E | 14.9x | 10.2x | 3.9x | 4.4x | 8.3x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $6.94 gives a target price of $57.9 for the end of 2023. This price target implies a 105% upside from the December 23 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 6.3x | 7.3x | 8.3x | 9.3x | 10.3x |
EPS – 2023 ($) | 6.94 | 6.94 | 6.94 | 6.94 | 6.94 |
Target Price ($) | 44.0 | 51.0 | 57.9 | 64.9 | 71.8 |
Market Price ($) | 28.3 | 28.3 | 28.3 | 28.3 | 28.3 |
Upside/(Downside) | 55.9% | 80.4% | 105.0% | 129.6% | 154.1% |
Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $48.9, which implies a 73% upside from the current market price. In my opinion, the market has overreacted to the prospects of an earnings decline. The company is still on track to report earnings that are much higher than the pre-pandemic level. Based on the expected price upside, I’m adopting a buy rating on Customers Bancorp, Inc.
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