This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Regional Banks May Follow Cullen/Frost's Investor-Friendly Deal

NEW YORK ( TheStreet) -- A move by Cullen/Frost Bankers (CFR - Get Report) of San Antonio, Texas, could point the way for other banks to boost their returns on equity, enriching investors.

Cullen/Frost on Wednesday priced a $150 million perpetual preferred stock offering with a coupon of 5.375% and said it planned to use $144 million of the net proceeds to buy back roughly 4% of its common shares. The common shares closed at $61.25 Wednesday, trading for twice their tangible book value and for 15.2 times the consensus 2014 EPS estimate of $4.03, according to Thomson Reuters.

Those valuations are high. Of course, Cullen/Frost has been a steady performer, with operating returns on average assets (ROA) ranging between 1.12% and 0.123% over the past five years, according to Thomson Reuters Bank Insight. But there are other strong banks trading at lower multiples.

Wells Fargo (WFC - Get Report), for example, closed at $35.23, trading for 1.6 times tangible book value and 9.1 times the consensus 2014 EPS estimate of $3.89. Wells Fargo's ROA has ranged between 0.44% and 1.41% over the past five years, but the lowest return was in 2008, during the worst of the credit crisis. The ROA improved to 0.97% in 2009 and increased steadily to 1.44% last year.

Another example is U.S. Bancorp (USB - Get Report) of Minneapolis. The company has been the strongest and steadiest performer among the nation's largest banks, with ROA ranging from 0.82% to 1.62% over the past five years. The 0.82% return was in 2009 and the 1.62% return was for 2012. USB's shares closed at $33.93 Wednesday, trading for a high 2.7 times tangible book value, but a far more modest 10.3 times the consensus 2014 EPS estimate of $3.29.

It would seem that long-term investors are quite pleased with Cullen/Frost's predictable earnings.

So why would the company buy back common shares at such high valuations?

The Collins Amendment and the Federal Reserve

For starters, Cullen/Frost saw fit to issue non-cumulative perpetual preferred shares to lock in some relatively low-cost regulatory capital. Under the Federal Reserve's new capital rules proposed last June, about 1.5% of most banks' regulatory Tier 1 common equity ratios can be made up of non-cumulative perpetual preferred shares. KBW analyst Jefferson Harralson on Thursday said in a report that "CFR likes swapping out 12% cost of capital for sub-5.5% cost of capital."
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
CBSH $46.82 0.00%
CFR $63.99 0.00%
SBNY $137.83 0.00%
USB $42.69 0.00%
WFC $49.98 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs