Cullen/Frost Earnings: Results Meet Expectations, but Outlook Dims Slightly

Cullen/Frost Bankers Stock at a Glance

• Fair Value Estimate: $122.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Cullen/Frost Bankers Earnings Update

Cullen/Frost Bankers CFR reported second-quarter results that once again showed some slight pressure on earnings, but we view this as quite manageable. We highlighted the bank as one of our top picks heading into the first-quarter earnings season. Since then, it’s traded up from the lows seen in March and once again in May. Cullen/Frost was trading close to our fair value estimate going into earnings this quarter, and we thought other names presented better valuations.

Second-quarter results were decent. Net interest income, or NII, was in line with our outlook, and the bank surpassed our expectations on fees and expenses. This led to earnings per share coming in at $2.47, versus our expectation of $2.35.

Despite the near-term beat on expenses, management maintained its full-year outlook for expense growth in the mid-teens, suggesting a fairly large step up in the final two quarters. Management’s guidance that full-year EPS would probably come in below $9.63 also seems to imply a decent step down in NII for the rest of the year.

The bank was able to increase its loan balances at a decent pace (1.5% sequentially), but it did see deposit outflows of 4% sequentially—something the market is penalizing banks for in the current environment. We would not read too much into these movements. We were already expecting deposits to decline to these levels for the year, and some deposit outflows in the current rate environment are not completely unexpected nor do they represent a fundamental problem in the deposit base.

Cullen/Frost still has the third-lowest total cost of deposits in our coverage, and deposit betas in the quarter roughly tracked our expectations. We expect some additional pressure on earnings for the rest of the year, but nothing that the bank cannot handle. As we adjust our forecasts, we do not expect a material revision to our $122 fair value estimate.