Cullen/Frost Earnings: Net Interest Income Holding Up Well; Loan Growth Is Strong

Narrow-moat-rated Cullen/Frost CFR reported third-quarter results that outperformed expectations. The bank reported EPS of $2.38, ahead of the FactSet consensus of $2.11 and our own estimate of $2.19. Shares had been trending close to our fair value estimate through mid-July but have since traded lower, opening up a valuation gap, in our view. We do not expect a material change in our $122 per share fair value estimate. Even after the positive reaction to today’s earnings, with the stock up 8% as of this writing, we still see room for additional appreciation from here. We continue to view Cullen/Frost as one of the best-managed, lower-risk banks in our coverage.

One of the biggest items investors have been paying attention to this quarter has been the trajectory of net interest income and whether we are reaching a bottom as a lack of clarity around further downside remains. Cullen/Frost’s NII remained flat quarter over quarter, better than we expected, which signals that the bank may have already hit its bottom for NII. Deposit pricing also came in a bit better than we expected, an important trend in the current environment. Provisioning and fees were in line with our expectations, while expenses came in just below. We had been looking for closer to 15% expense growth in 2023 and now wonder if 14% or even slightly less might be more likely.

The bank was still able to grow its loan balances at a decent pace, 4% sequentially, and the bank kept period-end deposits roughly flat. We cautioned last quarter, when the bank was seeing deposit outflows, that we would not read too much into it, and we believe the current quarter’s results support our contention that Cullen/Frost’s deposit base will hold up just fine.