Cullen/Frost Earnings: Minimal Effects From Banking Industry Turmoil

Cullen/Frost Stock at a Glance

• Fair Value Estimate: $124.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Cullen/Frost Earnings Update

Narrow-moat-rated Cullen/Frost Bankers CFR reported first-quarter results that show some slight pressure on earnings, but we view the pressure as quite manageable. We highlighted the bank as one of our top picks heading into earnings season, with a unique insider buy signal, and we believe these results have vindicated that call.

As we incorporate the latest results, we do not expect a material change to our $124 fair value estimate, although we may increase it slightly since near-term results are coming in better than our updated “shocked” projections from late March. Even after the April 27 stock price increase, we still see the shares as slightly undervalued.

We had expected fourth-quarter net interest income would likely be the peak for a while, until balance sheet growth overcame funding pressure. Cullen/Frost was one of only a select few banks under our coverage that was still able to increase NII in the first quarter compared with last quarter.

Cullen/Frost Sees Manageable Drop in Deposits

The bank saw a manageable drop in deposits of only 4%, which was in line with the low- to mid-single-digit percentage declines we’ve seen for most of the banks we cover. The bank’s deposit costs increased, but at a relatively slow rate compared with most peers. The bank’s deposit beta was only 42% in the quarter, whereas some peers were starting to hit the mid-70s. Overall, we view these as solid results that show the strength and stability of the Cullen/Frost deposit base and franchise. The bank has consistently been one of the most conservatively and well managed under our coverage.

Fees are generally trending about where we expected, with some weakness in trust and investment management fees offsetting some strength in insurance commissions and fees. Expenses were slightly ahead of our quarterly estimates but still generally fit within the overall expense amounts we were expecting for the full year, and management maintained its full-year expense guidance.