Yahoo Finance Commerce Bancshares (CBSH) Rides on High Rates Amid Cost Woes
Commerce Bancshares, Inc. CBSH remains well-positioned for growth on the back of decent loan demand, high rates and a solid balance sheet. However, deteriorating asset quality and an elevated expense base are headwinds.
CBSH’s organic expansion efforts have been driving its growth strategy. Revenues witnessed a five-year (2018-2023) compound annual growth rate (CAGR) of 3.5%. This growth was primarily driven by strong loan balances (which experienced a 4% CAGR over the four-year period ended 2023) and fee income sources. The uptrend continued for both metrics in the first quarter of 2024. Decent loan demand alongside solid non-interest income performance is likely to drive top-line expansion. We project total revenues to rise 1.1%, 2.1% and 2.7% in 2024, 2025 and 2026, respectively. Moreover, we anticipate the loan balance to witness a 6% CAGR by 2026.
Amid the current high interest rate environment, Commerce Bancshares’ net yield on interest-earning assets is likely to grow in the upcoming quarters. Yet, rising funding costs will exert pressure on it. In May 2024, the company announced a balance sheet repositioning strategy to boost its net interest income. The company aims to sell off its debt securities and reinvest the proceeds at higher yields as part of this strategic move. In 2023, the net yield on interest-earning assets expanded to 3.16% from 2.85% in 2022. The uptrend continued in the first quarter of 2024. We anticipate the metric to be 3.30%, 3.31% and 3.32% in 2024, 2025 and 2026, respectively, per our projections.
As of Mar 31, 2024, CBSH’s total debt (comprising other liabilities and other borrowings) was $464.1 million. Cash and due from banks and interest-earning deposits with banks was $1.9 billion. The company enjoys investment grade ratings of A- and a stable outlook from Standard & Poor’s. This enhances the company’s accessibility to the debt market. Thus, the company’s earnings strength enables it to address its near-term debt obligations, even in the event of economic turmoil.
Commerce Bancshares currently carries a Zacks Rank #3 (Hold). Over the past three months, shares of the company have rallied 5.8%, outperforming the industry’s growth of 4%.
Image Source: Zacks Investment Research
Nonetheless, Commerce Bancshares’ persistent increase in non-interest expenses is a concern. The metric witnessed a 4.8% CAGR over the last five years ended 2023, primarily due to higher salaries and employee benefit costs. The metric increased in the first three months of 2024 as well. Overall expenses are likely to remain elevated in light of ongoing technological upgrades and inflationary pressures. We project non-interest expenses to see a CAGR of 4.2% by 2026.
CBSH’s deteriorating asset quality is another headwind. While the company recorded a provision benefit in 2021, a significant rise in provision for credit losses was witnessed in 2022 and 2023. Though provisions dipped in the first quarter of 2024, overall provisions are likely to remain high in the near term as the company continues to build reserves to tackle the tough operating backdrop. Per our estimates, provision for credit losses is anticipated to rise 11.4% in the second quarter of 2024.
Banking Stocks Worth Considering
Some better-ranked bank stocks worth a look are UMB Financial Corporation UMBF and 1st Source Corporation SRCE.
Estimates for UMBF’s current-year earnings have been revised 14.4% upward in the past month. The company’s shares have rallied 15% over the past six months. Currently, UMBF sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for SRCE’s current-year earnings have been revised 2.8% north in the past 30 days. The company’s shares have risen 4% over the past six months. Currently, SRCE carries a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Commerce Bancshares, Inc. (CBSH) : Free Stock Analysis Report
UMB Financial Corporation (UMBF) : Free Stock Analysis Report
1st Source Corporation (SRCE) : Free Stock Analysis Report
