The Market Is More Than Willing To Give Cullen/Frost The Benefit Of The Doubt Today

You don’t have to look very hard to find things to like about Cullen/Frost Bankers (CFR) (“Cullen Frost”), the holding company that owns Texas’s Frost Bank. Cullen Frost has grown deposits by almost 9% a year over the past decade, outgrowing the 8% growth in Texas, has a loan book that is more skewed to business operations (C&I instead of CRE), has exceptionally low deposit costs, and above-average historical credit quality.

You also don’t have to look hard to see a forward P/E multiple more than 50% above its peer group average and a P/TBV ratio likewise about 50% above where it should be on the basis of near-term return on tangible common equity (ROTCE).

I like a lot about Cullen Frost, and I believe the company could be more active on synergistic M&A if management wanted to go that route, but this isn’t a very acquisitive bank and I’m concerned about the impact of weak spread growth prospects over the next couple of years relative to that valuation. Cullen Frost has done better for its shareholders than most banks over the long term, but at today’s price I just don’t see a lot of value.

 

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The Market Is More Than Willing To Give Cullen/Frost The Benefit Of The Doubt Today