Consistency Carrying Commerce Bancshares

I believe that at least part of the reason that investors are willing to bid up Commerce Bancshares (NASDAQ:CBSH) to above-average multiples is that this bank is built to weather the ups and downs of normal banking cycles without much drama. And so it would seem to be the case in the fourth quarter as well, as the bank continues to see solid, but not spectacular, results.

Commerce shares are up a bit from my last update, outperforming peers in a market where there is still a lot of angst as to what banking earnings will look like in 2023 due to rising deposit costs and more limited operating leverage prospects. As much as it surprises me to say this, I don't find the valuation all that bad, at least relative to what passes for normal with Commerce, and while I can't really recommend it wholeheartedly as a bank stock likely to generate substantial outperformance, I think it is a name for investors who want less drama and volatility.

 

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Consistency Carrying Commerce Bancshares

Commerce Bancshares: In Tougher Times, The 'Platinum Tortoise' Outperforms

I've criticized the premium multiple of Commerce Bancshares (NASDAQ:CBSH) in the past, but in tougher times like these, the Street certainly seems to appreciate the quality core deposits and demonstrated underwriting competence of this conservatively-run Midwestern bank. To that end, the shares are almost flat since my last update, a period during which the average regional bank stock lost around 10% of its value.

I'm not excited about paying over 16.5x my forward EPS estimate for CBSH, and likewise, a long-term discounted core earnings model doesn't suggest a great bargain today. That's par for the course with these shares, though, and I suspect long-term holders of these shares won't be bothered by it. I do think banks, as a sector, are undervalued now and as sentiment turns, I don't expect Commerce to continue to outperform given the more moderate growth outlook and the already-robust valuation.

 

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Commerce Bancshares: In Tougher Times, The 'Platinum Tortoise' Outperforms

Valuation Still The Biggest Issue With Commerce Bancshares

 

If you had to overpay for a bank you could certainly do worse than Commerce Bancshares (CBSH), as this Midwestern lender has a good track record of both internal value creation and relative performance within the banking sector. Still, I’m not in the habit of overpaying for assets unless there’s a very good reason to do so, and these shares have fallen a bit since my last update on the shares, underperforming other regional and community banks by more than 10%.

Even with that period of underperformance, I can’t find a compelling argument to pay up for these shares, and trading at around 18.5x the Street’s FY’23 EPS estimate, investors definitely have to pay up. While there are several fine attributes to Commerce, including strong fee-generating businesses, a very good underwriting track record, and a plan to continuing targeting commercial loan growth markets outside the Midwest, the overall outlook for loan growth isn’t that special and the bank isn’t particularly leveraged to rate hikes.

 

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Valuation Still The Biggest Issue With Commerce Bancshares

Commerce Bancshares: Overcapitalized With Lackluster Growth And High Valuation; Shares Aren't Compelling

 

Where quality is concerned, it’s hard to beat Commerce Bancshares (CBSH) – conservatively run and with a strong mix of non-spread income sources, Commerce is a strong “all weather” regional bank that has generated impressive above-average returns over the long term. On the other hand, Commerce has more capital on hand than it can use and the growth is not very impressive, as there’s little Commerce can do to drive loan growth in the present environment.

I’ve been concerned about Commerce’s valuation for some time, and the shares have underperformed over the last year and since my last update on the company, as investors have shifted toward names with higher risk and better growth prospects. It remains difficult to make a valuation argument for Commerce, and while I do think the underlying long-term results will be good, that already seems anticipated by today’s share price.

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Commerce Bancshares: Overcapitalized With Lackluster Growth And High Valuation; Shares Aren't Compelling

Flush With Capital, Commerce Bancshares Has Some Decisions To Make

Core pre-provision earnings growth is going to remain challenging for banks in 2021, as loan demand remains soft, rates remain low, and most banks have already made their major moves on structural costs. Commerce Bancshares (CBSH) is in a better situation with respect to credit than most, and that’s not a trivial driver looking at core growth below the pre-provision line, and the bank is also flush with capital, giving management a better set of options when it comes to deploying capital towards growth and/or returning capital to shareholders.

I was concerned at the time of my last write-up that, for all of Commerce’s positive attributes, the shares were nevertheless at risk for lagging the broader bank sector. That has proved the case as the “risk-on” trade has continued with Commerce’s double-digit move lagging its peers by more than 10%. Valuation remains a valid concern here, but I do think the optionality on capital is an invaluable positive attribute going into this year.

 

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Flush With Capital, Commerce Bancshares Has Some Decisions To Make

Commerce Bancshares Delivers Better Results From Its Strong Balance Sheet And Business Mix

Third quarter results highlight yet again that Commerce Bancshares' (CBSH) premium valuation isn't without merit, as the bank once again leveraged its low-cost deposit base and differentiated business mix to deliver better results than its peer group. Commerce remains flush with capital that can be deployed into growth M&A, while the credit situation remains very good.

Interest in the banking sector has picked up a bit in recent months, and with a slight shift toward "risk on", Commerce has lagged the sector a bit since my last update. Perception and sentiment remain the biggest risks I see here. Commerce is thought of as a very high-quality conservative bank, and it tends to outperform in the bad times, but I'm increasingly of the mind that the bank's underlying long-term growth potential has been underappreciated (myself included). Should Commerce be left behind in a "flight from quality" when investor interest returns to banks, this would definitely be a name to revisit.

 

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Commerce Bancshares Delivers Better Results From Its Strong Balance Sheet And Business Mix

Commerce Clicks Off Another Quarter, But Value Is Hard To See

I admit that Commerce Bancshares’ (CBSH) valuation is a puzzle to me. I appreciate the virtues of a bank with very strong fee-generating businesses, low asset sensitivity, and strong core operations in a challenging part of the cycle like this, but the market seems to value that to an excessive degree in the case of Commerce. Not that it has hurt performance, though, as these shares have been a standout performer in the space going back as far as 15 years (with respectable outperformance since my last update as well).

I’m still not comfortable with the valuation, and that’s pretty much a deal-breaker for me. But as far as investors who are/were already comfortable with the valuation here, I don’t really see anything in the fourth quarter results that should shift sentiment.

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Commerce Clicks Off Another Quarter, But Value Is Hard To See

Commerce Bancshares Richly Rewarded For Its Quality And Stability

I’ve made the point many times before that valuation doesn’t drive stocks as much as many investors seem to think – stocks don’t go up just because they’re cheap, and likewise don’t go down just because they’re expensive. I didn’t expect the nearly 15% move in Commerce Bancshares (CBSH) since my last update, but then I also didn’t expect the relatively aggressive decision to launch an accelerated share repurchase program, and in this environment, investors really love those upfront capital returns.

My core view on this bank really hasn’t changed, though. It’s an exceptionally well-run bank and an uncommonly conservatively-run bank. Although Commerce won’t suffer as much spread compression as its low-cost deposit base would otherwise suggest, I’m not going to pay more than 18 times next year’s earnings for a bank likely to grow its pre-provision profits at a very low single-digit rate for the next five years.

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Commerce Bancshares Richly Rewarded For Its Quality And Stability

Weak Loan Growth And Tighter Spreads Pinching Commerce Bancshares

I haven’t been very bullish on Commerce Bancshares (CBSH), as I think the market assigns too high of a quality premium relative to this Midwestern bank’s lackluster growth profile and its-good-but-not-THAT-good credit quality. With the shares continuing to underperform the market and the sector since my last update, and second quarter results coming in weaker than I expected, I don’t really see much reason to change my core stance on the bank.

Commerce does have a lot of capital, too much really for its needs, and what management plans for that capital is a meaningful potential driver down the road. Whole bank acquisition would be an atypical move for this bank, but acquiring fee-generating businesses in the payments area is a possibility. As is, though, I think Commerce is an expensive, low-growth bank without even much of a dividend to pay for patience.

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Weak Loan Growth And Tighter Spreads Pinching Commerce Bancshares

U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

As one of the best banks out there in terms of quality, U.S. Bancorp (USB) tends to be better as a “safe haven” or a long-term holding. When bank stocks were falling apart in late 2018, U.S. Bancorp held up a little better, but the shares have also lagged peers since the start of this year as banks have largely kept pace with the S&P 500.

I expect that it is going to be harder for banks to grow going forward, as I think net interest margins are peaking and credit costs are likely to head higher from here. Loan growth is healthy now, but I do still have some concerns about the overall economy. With that backdrop, I think organic growth drivers are going to be more important, and with U.S. Bancorp now free of its consent orders, it has more options to drive growth through organic expansion and branch rationalization. U.S. Bancorp isn’t particularly cheap now, but it’s definitely a name to watch for relative underperformance.

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U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

The Rate Cycle Weighing More Heavily On Comerica

As one of the most asset-sensitive banks that I follow, Comerica (CMA) has a lot to lose from a flattening yield curve that is seeing deposit costs rise while LIBOR-based loan yield grow looks more restrained. Capital and credit quality are still above-average, but average loan growth in the face of rising spread pressure is a tough combination and pre-provision growth is likely to decelerate into the mid-single digits and exit the year in the low single-digits (and possibly stay there a little while).

I’ve felt similarly about Comerica and Citigroup (C) over the past year, insofar as I don’t really love either business, but at the right price there can be some opportunity. At this point, though, I’m concerned about Comerica’s vulnerability to sooner-than-expected rate cuts and its lackluster loan growth and I think it will be harder to answer the “why should I own Comerica?” question positively as core operating income growth stalls and capital returns moderate.

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The Rate Cycle Weighing More Heavily On Comerica

Commerce Bancshares Investors Pay For Better Than This

Given that I thought Commerce Bancshares (CBSH) shares were fairly expensive back in January, I’m not all that surprised that the shares underperformed the major regional bank indices since then, particularly as sentiment seemed to be shifting across the market a bit more towards “risk on”. Still, I was surprised to see the first-quarter miss. Seeing as how I believe that Commerce Bancshares’ premium is often justified by analysts and investors on the basis of superior quality and operating stability, I do worry that if this quarter is more than just an aberration, it could mean more significant underperformance for shareholders.

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Commerce Bancshares Investors Pay For Better Than This

Commerce Bancshares Well-Rewarded For Its Quality And Stability

When “stuff” starts to go fan-ward in the bank sector, Commerce Bancshares (CBSH) often shines. Conservatively run, Commerce can often get left behind when things are going great, but investors often prize its more reliable earnings performance and credit quality. And even though Commerce isn’t really thought of as a grower, high single-digit trailing tangible book value and core earnings growth, as well as double-digit EPS growth, isn’t exactly bad.

Valuation is still a sticking point for me. Commerce has outperformed its peers over the past six and twelve months, but it’s tough to connect the dots on the valuation today. I like management’s efforts to expand its commercial banking footprint and withstand increasing competition in its core market, but it looks like there’s already a meaningful quality premium built into the share price.

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Commerce Bancshares Well-Rewarded For Its Quality And Stability

Commerce Bancshares Executing At A Very High Level

As the quarterly earnings cycle starts up, Commerce Bancshares (CBSH) has established a pretty high mark for other mid-cap banks to beat. That’s nothing especially new for this well-run Midwestern bank, but the key issue remains valuation. While Commerce Bancshares has been operationally excellent for some time, I believe the high valuation has been a headwind and at least partly explains why the shares have lagged many regional peers in recent years.

Commerce Bancshares has an excellent net beta and good management, and is likely to accumulate a large amount of excess capital in the coming years, but the combination of weak balance sheet growth and still-high valuation limits my enthusiasm for buying the shares.

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Commerce Bancshares Executing At A Very High Level

Iberiabank In The Middle Of A Tough Balancing Act

While the share price at IBERIABANK Corp. (NASDAQ:IBKC) ("Iberiabank") has rocketed up since the election (along with many, if not most, other bank stocks), there are still a lot of areas where management has work to do. The energy portfolio has shrunk, but credit quality has worsened, and there are some legitimate concerns about how management has been managing excess liquidity in a low-rate environment.

As is often the case with most stocks, a lot of it comes down to valuation. If Iberiabank were trading around 1.5x tangible book, I'd be excited about the deposit footprint and the toeholds in multiple growth markets across the South. As it is, though, I think the Street is more than rewarding the stock for the improvements in operating efficiency, the probable loan growth trajectory, and the possibility of a more constructive regulatory environment.

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Iberiabank In The Middle Of A Tough Balancing Act

Seeking Alpha: Commerce Bancshares Has A Strong Core, But Needs More Cardio

Analyzing and writing about a bank like Commerce Bancshares (NASDAQ:CBSH) can be a frustrating exercise, because there's nothing really wrong with this conservatively-run Midwestern institution, but the upside in the shares, absent a new growth driver, just isn't impressive. Like U.S. Bancorp (NYSE:USB), though, Commerce Bancshares knows what it is, and the management is not going to change course just to make the shares a little more exciting for short-term speculators.

I continue to believe that CBSH can leverage its low-cost deposit base in Kansas and Missouri, along with rising rates and good fee income growth, to generate mid-teens ROE down the road, supporting cash earnings growth of around 7% for the next five years. That's not enough to drive a compelling fair value today, but Commerce looks like a safer bet for investors who believe interest rate hikes will be slow to arrive and that credit conditions could get a little hairy in the short term.

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Commerce Bancshares Has A Strong Core, But Needs More Cardio

Investopedia: Absent Higher Rates, Comerica Has Probably Gone Far Enough

Comerica (NYSE:CMA) is a curious bank in multiple respects. Although it has a sizable commercial loan book, the net interest margin isn't all that impressive. On the other hand, this looks like one of the most asset-sensitive of the larger banks, and income could accelerate relatively quickly if rates head meaningfully higher. All things considered, while I think Comerica's market position in Texas and California is worth more than average, I think the shares don't offer all that much promise unless you have a firm belief that the company can generate significantly better long-term returns on equity than the sell-side presently expects.

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Seeking Alpha: Commerce Bancshares Starts The Season With A "Meh"

Surprises at banks seem to skew to the negative much more often than to the positive, so a relatively dull quarter in not such a bad result for Commerce Bancshares (CBSH). What's more, this highly-focused Midwestern bank continues to show very good loan growth in an increasingly competitive market. While I like management's recent move to acquire a small bank in Oklahoma, the valuation here seems too rich and I'm not completely sold on the company's strategy of increasingly funding loans with wholesale deposits.

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Commerce Bancshares Starts The Season With A "Meh"

Investopedia: U.S. Bancorp Is Strong But Needs Growth

This earning season is starting to feel like a broken record, or at least for the high-quality banks. Economic uncertainty has led many would-be borrowers to delay taking out loans, low interest rates make it tough to make money on the spread, and new regulations have hurt fee income and increased costs.

Add U.S. Bancorp (NYSE:USB) to that list of banks where the Street seems to be saying “yeah, we know you're good, but we want growth.” While this large super-regional bank looks like a very solid long-term banking holding, this stock may not really get going unless or until the economy picks up and/or investors shift funds from overheated sectors towards the financials.

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Investopedia: Comerica Looks Like A Slow-Coiling Spring

With interest rates so low, loan demand pretty sluggish, and regulations chewing into once-lucrative sources of income, most banks are stuck in a holding pattern. That's particularly true for those banks with relatively clean credit stories that don't have the tailwind of improving provision and loan loss reserve releases to pump up results.

That puts investors in a tough place with Comerica (NYSE:CMA). Certainly there isn't much near-term growth potential to get excited about here. Yet, the company remains very highly leveraged to an eventual rise in interest rates. At the same time, the company's underlying quality and footprint make it an appealing M&A candidate should the board decide it's time to look to sell. In the meantime, though, it's hard to get excited about these shares at the present valuation.

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