Since the start of the pandemic, Bancorp Customers (CUBI -1.82%), a roughly $20 billion asset bank based in Pennsylvania, saw its stock price more than triple, only to see it drop significantly this year along with many other banking and technology stocks. Throughout this time, the bank has not only performed well, but has also rolled out a wide range of new banking products and services that should continue to fuel growth in the future.
The fact that the market lacks this performance, growth and expansion leads me to believe that Customers Bancorp shares are undervalued. Here’s why.
Clients Bancorp has a growing product set
Customers have some of the most diverse product offerings I’ve seen for a bank of its size. The bulk of the bank’s business is in the commercial sector, where it makes all kinds of loans, from commercial real estate and multifamily real estate to loans made in partnership with the US Small Business Administration and services specialized banks.
Specialty banking has been responsible for much of the growth in customer lending in recent times, particularly through lending to private equity, venture capital and other types of lenders. Specialty commercial loans increased by $1.6 billion in the second quarter of the year.
Customers continue to work on rolling out other digital lending products for small and medium businesses, such as revolving term loans, equipment finance loans, and commercial credit cards.
The bank is also scaling up its Customers Bank Instant Token (CBIT), a blockchain-based instant payments platform that allows multiple parties on the platform to send funds to each other. The platform is particularly useful for crypto trading, as cryptocurrencies trade in real time. Customers are currently accelerating CBIT, which now has 190 customers, who have brought more than $2 billion in low-cost or no-cost sticky deposits with them to the bank.
The bank also wants to expand its real-time payment capabilities and create a suite of cloud-based treasury products for commercial enterprises that are powered by application programming interfaces. The suite would offer digital account integration, real-time reporting, account payment, analytics, and payments, including an automated clearinghouse, wired payments, currencies, and CBIT. This could be another way for the bank to generate deposits.
Bancorp customers continue to perform
It’s hard to say that Customers isn’t already running. In the second quarter of the year, the bank generated a return on average common equity of over 18%, which is really strong. Customers also had an efficiency ratio, which looks at a bank’s expenses as a percentage of revenue (less is better), of 42%, which is excellent.
But in this type of market, it seems investors would like to see the bank continue to improve its deposit base. They also monitor credit quality.
Customers did a good job of increasing non-interest bearing deposits, on which the bank pays no interest, by 73% from a year ago. However, the bank could still do a better job of improving its base of interest-bearing deposits and also still has higher cost borrowings on the balance sheet.
I expect CBIT to allow clients to increase higher quality deposits, but with the current crypto winter, they might not come as fast this year as originally expected. Nevertheless, the fact that customers saw growth in CBIT deposits in the difficult conditions of the second quarter is good news. I also think the bank can improve deposits by attracting more small businesses and rolling out this new suite of digital cash solutions, which could also take some time.
Investors are likely still watching credit quality, given all of the bank’s new vertical lending. Credit still looks extremely healthy, with non-performing assets down from the first quarter of the year. Net write-offs, or debts unlikely to be collected, increased in the quarter due to what appears to be an isolated incident and higher write-offs in customers’ consumer loan portfolios. The bank has a portfolio of installment loans of $1.9 billion, which may worry investors, but those loans have largely been made to prime and blue chip borrowers.
Cheap valuation by all measures
Customers are doing a lot of new stuff right now, and while the performance is pretty strong, investors probably want to make sure this isn’t a fluke and that management will execute on all of these initiatives. It’s also a very tough market, and clients seem to have been swept away by other tech and crypto stocks that have fallen sharply this year.
But by all indicators, the bank’s stock looks cheap. Management still expects to generate $4.75 to $5 in base earnings this year, meaning the stock is trading at less than eight times expected earnings for 2022. Management also plans to increase the tangible book value, or its net worth, at $40 per share by the end of the year, which means the bank is currently trading below what management expects to be its tangible book value in less than six month.
Clients still have a lot of work to do and a lot to prove, but the bank has generated strong results in recent quarters and its new products seem to be off to a good start. I like the stock at this valuation.