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TheStreet Open House

Cullen/Frost Leads Banks Higher as GDP Growth Stays Solid

NEW YORK (TheStreet) -- Cullen/Frost Bankers (CFR) of San Antonio was the sector winner on a strong Thursday day for bank stocks, with shares rising 3% to close at $74.89, as investors cheered good economic news.

The Dow Jones Industrial Average rose 0.7%, while the S&P 500 was up 1.1% and the NASDAQ Composite ended with a 1.8% gain, after the Bureau of Economic Analysis said that the U.S. gross domestic product grew at an annual rate of 3.2% during the fourth quarter.

That is a healthy pace for GDP growth, coming in slightly higher than the consensus estimate of 3.1% among economists polled by Thomson Reuters. The GDP growth declined from 4.1% during the third quarter.

Investors were clearly pleased with the mix of strong GDP growth, moderating inflation and even the slowdown in home sales, sending the KBW Bank (I:BKX) index up 1.1% to 68.36, with all but two of the 24 component stocks ending higher.

BMO Capital Markets economist Sal Guatieri in a client note earlier on Thursday stated the fourth-quarter GDP number was likely to confirm the Federal Open Market Committee's opinion "that growth in economic activity picked up in recent quarters." That language in the FOMC statement on Wednesday was changed from the language of several previous policy statements, in which the FOMC said the U.S. economy had been expanding at a "moderate pace."

The pace of GDP growth for 2013 was 2.7%, increasing from 2.0% in 2012. While the pace of economic growth accelerated, inflation was down. "The price index for gross domestic purchases increased 1.1 percent during 2013, compared with an increase of 1.5 percent in 2012," according to the Bureau of Economic analysis.

Also on Thursday pending home sales data from the National Association of Realtors showed an 8.7% decline in sale contracts during December, which was much larger than the 0.3% decline estimated by economists. "Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers," NAR chief economist Lawrence Yun said in the organization's press release.

"Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice. Although it could take several months for us to get a clearer read on market momentum, job growth and pent-up demand are positive factors," Yun added

The NAR expects total home sales for 2014 to come in at close to 5.1 million units, "essentially the same as 2013," with prices of existing homes expected to rise by roughly 5.4%.

While the drop in existing home sales was much larger than forecast by economists, it followed the recent trend, with the Census Bureau on Monday saying sales of new homes in December had fallen by 7.0%, although they were up 16.4% from a year earlier.

Cullen/Frost

Cullen/Frost Bankers on Wednesday reported fourth-quarter net income available to common shareholders of $60.6 million, or 99 cents a share, increasing from $58.4 million, or 96 cents a share, in the third quarter, and $60.2 million, or 97 cents a share, during the fourth quarter of 2012.

The company's fourth-quarter return on average assets (ROA) was 1.02% and its return on common equity (ROE) was 10.21%.

Jefferies analyst Ken Usdin rates Cullen/Frost a "hold," and on Thursday raised his price target for the shares to $73 from $70, writing in a note to clients, "A larger starting point for the balance sheet and positive asset mix shift push our earnings estimates higher for '14 and '15. Despite less than robust loan growth, Cullen's willingness to continue deploying its $4B of excess liquidity into high-yielding muni securities provides ample opportunity for [net interest income growth."

Cullen Frost's net interest income on a taxable equivalent basis rose to $185.0 million during the fourth quarter from $179.1 million the previous quarter and $172.2 million a year earlier. The company's net interest margin for the fourth quarter was 3.39%, up slightly from 3.38% in the third quarter, but down from 3.48% in the fourth quarter of 2012.

Usdin raised his 2014 earnings estimate for Cullen/Frost to $4.10 a share from $3.90, while raising his 2015 EPS estimate to $4.55 from $4.25.

Cullen Frost's shares trade for 17.5 times the consensus 2015 EPS estimate of $4.28. While that may seem to be a hefty valuation in the current environment for bank stocks, it reflects the company's amazing track record for maintaining good profitability for every single quarter through and after the credit crisis. The following chart showing Cullen/Frost's dramatic outperformance against the KBW Bank index and the S&P 500 since the end of 2007bears this out:

CFR ChartCFR data by YCharts


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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