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Commerce Bancshares (CBSH) Gains From Loans, Higher Costs Ail

Commerce Bancshares, Inc. CBSH is well-positioned for revenue growth, aided by the moderate rise in loan demand and its efforts to strengthen non-interest income. However, a steady rise in operating expenses and a lack of loan diversification are headwinds.

The company’s growth strategy is driven by organic expansion efforts. Though revenues declined in 2020, the same witnessed a five-year CAGR of 4% (ended 2021). The upside mainly stemmed from solid loans and deposit balances (which recorded a CAGR of 1.8% and 9.9%, respectively, over the same period), along with strength in fee income sources.

The continued rise in the demand for loans and solid non-interest income performance are likely to keep driving CBSH’s top-line growth. Our estimates for total revenues suggest a CAGR of 6.1% over the next three years.

Further, the company maintains investment grade ratings of A- and a stable outlook from Standard & Poor’s. This renders CBSH favorable access to the debt market. Despite a high debt burden, the company’s earnings strength implies that it will be able to meet debt obligations in the near term, even if the economic situation worsens.

However, Commerce Bancshares has been witnessing a persistent rise in non-interest expenses. Expenses recorded a CAGR of 2% over the last five years ended 2021. The rise was mainly due to higher salaries and employee benefit costs. Expenses are expected to remain elevated as the company invests in technology upgrades. Our estimates for total non-interest expenses suggest a CAGR of 6.6% over the next three years.

Like CBSH, several other banks like East West Bancorp, Inc. EWBC and Zions Bancorporation ZION are facing mounting operating costs. For EWBC, though the metric declined in 2020, it witnessed a CAGR of 4.5% over the last five years (2017-2021). Similarly, for Zions, costs declined in 2020, while recording a five year CAGR of 1.3%. Overall costs are expected to stay elevated due to an increase in headcount, inflationary pressure and investments in technology.

Despite the recent rate hikes and expectations of further rises this year, CBSH’s net yield on interest-earning assets is expected to remain under pressure for some time in the near term. We project net yield on interest-earning assets to be 2.53% for 2022 and 2.54% for both 2023 and 2024.


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