Community Bank System Needs Robust Growth (NYSE:CBU)

In a market the place I’m discovering loads of beaten-down financial institution shares the place valuations appear to be assuming undemanding long-term core earnings progress, I can’t actually say the identical for New York’s Group Financial institution System (NYSE:CBU) (“Group Financial institution”, or “Group”). Whereas I’m fairly impressed with this financial institution’s sturdy deposit franchise, fee-generating non-banking companies, and market progress alternatives, I really feel like that’s amply mirrored in right now’s worth.

I’ve to make use of a mid-teens P/E simply to get to right now’s worth, and likewise the shares already appear well-valued on the idea of long-term discounted core earnings and near-term ROTCE (because it drives P/TBV multiples). It is a title value placing on a watch listing, but it surely’s robust for me to argue for paying up for it right now, even when the financial institution’s credit score high quality and low deposit betas are well-suited to the present market.

Blended Outcomes To Finish The 12 months

Group’s fourth quarter outcomes had been blended relative to sell-side expectations and what I’ve seen total in earnings studies from smaller banks this quarter. Core pre-provision income seemed alright, however not distinctive, and I don’t see outsized pre-provision revenue progress subsequent 12 months.

Income rose about 10% 12 months over 12 months however was mainly flat on a sequential foundation, resulting in a modest miss relative to sell-side expectations (about 1%, or $0.015/share). Internet curiosity earnings was up greater than 17% yoy and near 2% qoq, which was a little bit weaker than I’d anticipated, as web curiosity margin rose 28bp yoy and shrank 1bp qoq to three.02%, whereas incomes property rose about 2% qoq.

Non-spread earnings is a significant contributor to Group’s earnings, however loads of the non-bank fee-generating companies are associated to the markets, and weaker fairness markets did have an effect that I believe obscures underlying power. Charge-based earnings fell barely from the prior 12 months and greater than 2% sequentially, with service expenses up 4% qoq, worker advantages earnings up 4%, and wealth administration and insurance coverage earnings down about 17%.

Adjusted working bills had been up 6% yoy and down 1.5% qoq, coming in higher than I’d anticipated, although the effectivity ratio of 60.4% remains to be a little bit excessive relative to its peer group. Adjusted pre-provision income rose 17% yoy and about 3% qoq, good for a small beat relative to my expectations (about $0.01/share), however nonetheless fairly lackluster in comparison with many smaller banks. Decrease than anticipated provisioning helped enhance total outcomes.

High-Notch Deposit Betas, Offset By Modest Mortgage Development And Yield Growth

Group posted about 3% end-of-period mortgage progress, which whereas not forward of what typical smaller banks have finished, isn’t far behind. Industrial lending was sturdy, up greater than 4%, whereas mortgage lending slowed (up about 1%) and shopper oblique lending (autos, principally) rose greater than 5%.

Yields improved a modest 20bp yoy and 17bp qoq to 4.39%, held again partially by the financial institution’s skew to fixed-rate shopper lending. The financial institution originated $560M of loans within the quarter, although, and with a richer combine of economic loans, the yield on these new loans was just below 6%.

On the deposit facet, deposits declined 3.5% on an end-of-period foundation, with a 3.3% decline in non-interest-bearing deposits. That latter quantity is best than common, and Group continues to learn from a large core deposit base that’s not particularly rate-sensitive. Non-interest-bearing deposits stay at a wholesome 31.5% of complete deposits, and the mortgage/deposit ratio of 68% is comfy in the intervening time.

Deposit prices stay very engaging, with interest-bearing deposit prices rising simply 14bp yoy and 9bp qoq to 0.26%, whereas total deposit prices rose 10bp yoy and 6bp to only 0.18% – an extremely sturdy consequence relative to most banks. With this, Group’s cumulative deposit beta stays at an exceptionally low stage within the low single-digits at a time when many banks are seeing their deposit beta hit the high-20%’s or worse.

Alternatives To Develop

There are loads of issues I like about Group Financial institution. Whereas this can be a comparatively small financial institution within the grand scheme of issues, in 12 of 13 nations the place it has $500M or extra in deposits it has deposit share of 25% or increased (over 70% in some circumstances). That gives a very good basis of sticky low-cost deposits in markets that aren’t prone to entice loads of branch-based competitors.

I additionally suppose there’s above-average mortgage progress potential right here. Group is keen to stay energetic in oblique auto lending at a time when many banks have pulled again, and whereas auto lending has pushed outsized losses for some banks up to now, Group’s enterprise is anchored by very sturdy credit score high quality (a mean FICO of 750).

I additionally suppose there are alternatives to develop the business lending portfolio. Considered one of Group’s main opponents in lots of markets is M&T Financial institution (MTB), and whereas I like this financial institution, giant acquisitions like M&T’s acquisition of Individuals’s are inclined to drive outsized buyer attrition, significantly prospects that want to work with smaller banks. I believe this might be a possibility for Group to achieve some business lending share over the subsequent 12 months or two and/or probably seize some income producers who would like to work elsewhere.

Final and never least is ongoing progress potential within the fee-based companies. The markets for worker profit/retirement plan administration remains to be fragmented and bigger gamers don’t at all times do a very good job of serving smaller enterprise shoppers, giving Group a possibility. Likewise with the insurance coverage operations.

The Outlook

My difficulty with Group has all the things to do with the expansion expectations that now appear embedded within the valuation. Administration’s steerage for 2023 leads me to suppose that high-single-digit pre-provision revenue progress will likely be difficult. Likewise, it seems to be just like the share worth already anticipates excessive single-digit long-term core earnings progress. I don’t rule that out as achievable, however there are undoubtedly different banks on the market that I consider will obtain related progress and sport a lot decrease valuations.

I’ve to make use of a 15.5x a number of on my ’23 earnings estimate simply to get to right now’s worth, and that doesn’t go away a lot on the desk when it comes to rerating. I do suppose Group’s low deposit beta and natural progress alternatives can drive above-average progress, however once more this appears to be within the share worth (likewise with a near-term ROTCE-based P/TBV strategy).

The Backside Line

Maybe I’m lacking one thing right here, however I simply don’t see right now’s valuation as significantly interesting. Group’s enterprise ought to be better-protected than many different banks which might be going through extra danger on funding prices and credit score high quality, however once more that appears to be within the worth. Likewise, I respect the mix of doubtless above-average earnings progress and a good dividend yield. It is a title I’d contemplate at a cheaper price, and it’s value following, however I simply can’t join the dots on the valuation right now.