Cullen/Frost Earnings: Branch Expansion Is Driving Strong Loan Growth

Key Morningstar Metrics for Cullen/Frost Bankers

• Fair Value Estimate: $106.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Cullen/Frost Bankers’ Earnings

Cullen/Frost Bankers CFR reported net income to common shareholders of $145 million, or $2.24 per diluted share, on $539 million of taxable-equivalent revenue, mostly in line with our expectations. After incorporating the third quarter’s results and slightly updated full-year guidance, we maintain our fair value estimate of $106 per share and view the stock as overvalued. We continue to view Cullen/Frost as one of the best-managed and lower-risk banks in our coverage, but the market already fully appreciates it, and we see better investing opportunities in other names.

Expenses ticked up 2% sequentially or 10% year over year, driven by increased headcount from branch expansion and annual salary increases. The bank now expects 2024 full-year expenses to increase by 6.0%-6.5%, mostly in line with our projections. We forecast 2024 full-year expense growth of around 10% after adjusting out noncore FDIC special assessment charges. We expect relatively high expense growth through 2025 as the bank continues to expand its branch network in Austin.

We think acquiring new customers and growing the balance sheet is more important than front-loaded expense growth from branch expansion investments. Average loans were up 12% from a year ago, demonstrating continued results with building new relationships. Frost has done noticeably well with loan growth this quarter, while the industry sees tepid commercial loan demand. Net interest income increased by 5% from a year ago, with balance sheet growth and asset repricing partially offset by the increase in funding costs. Cullen/Frost is one of the banks that’s more sensitive to interest rates, and if the Fed cuts rates rapidly, this will create more pressure on its net interest income.