Texas capital

Texas Capital (TCBI) Strategic Plan to Help Despite High Costs – May 27, 2022

Texas Capital Bancshares, Inc.it is (TCBI Free Report) a strong capital position should help it undertake opportunistic expansions of its product offerings. However, rising costs and high debt levels are major issues.

An increase in net interest income (NII) has driven Texas Capital’s revenue and organic growth in recent years. Revenues have grown at a compound annual growth rate (CAGR) of 2.1% over the past five years (2017-2021). The company’s strategic plan (announced in September 2021), outlining an expanded product offering and better coverage of potential markets, should support revenue growth in the coming quarters.

Texas Capital plans to digitize its operations by strategically designating internal and third-party platforms to grow and strengthen its customer experience. It aims to simplify customer interactions and enablement by focusing on modernizing infrastructure through cloud-native platforms, application programming interfaces to support scale, improving tools digital and process automation. This will be done across the workforce, realigning technology and operational resources to core business spectra, enabling faster response times and customer-centric development, and improvement ongoing cybersecurity and governance.

Texas Capital’s relationship-based business model is likely to increase its market share, driving loan and deposit growth in the coming period. Additionally, we believe the company’s loan portfolio and deposits are well positioned to continue to grow, supported by an improving US economy. Thus, the strength of the balance sheet is positive for TCBI.

The company’s capital ratios remain above the levels required to be considered well capitalized and have been improved with additional capital raised since 2008. As of March 31, 2022, the ratio of common tangible equity to total tangible assets was 8.9% versus 6.7. % in the quarter of the previous year. A CET1 ratio of 9-10% is expected by 2025. We believe Texas Capital’s strong capital position would help it undertake opportunistic expansions for the foreseeable future.

However, the bank continues to experience a persistent increase in spending over the past few years. This is due to efforts to hire experienced bankers, upgrade technology and expand footprints. These moves could boost Texas Capital’s long-term growth, but rising spending levels limit short-term earnings expansion. Management expects low double-digit expense growth this year and positive operating leverage by the end of 2022 or the first quarter of 2023.

As of March 31, 2022, Texas Capital had total debt (including long-term debt and short-term borrowings) of $2.36 billion, which has seen a volatile trend in recent quarters. The company’s cash and bank receivables as of March 31, 2022 were $234.9 million, up sequentially. Given the unhealthy liquidity situation, its debt looks unmanageable. The company’s significantly low cash levels will hurt if the economic situation deteriorates.

Amid the Fed’s dovish monetary policy stance and the prevailing low interest rate environment, margins have been affected. While the company may experience decent loan growth, supported by the economic recovery and the recent rate hike with the possibility of further increases in the future, margins are expected to come under pressure in the near term as the overall environment interest rates remain low.

So far this year, TCBI shares have lost 8.9%, against a 4.3% drop in the industry to which it belongs.

Image source: Zacks Investment Research

Currently, TCBI carries a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Actions worth a look

A few higher ranked stocks in the banking sector are Independent banking company (IBCP free report) and Civista Bancshares, Inc. (CIVB free report). IBCP and CIVB currently have a Zacks rank of 2 (buy).

Independent Bank’s Zacks consensus estimate for current-year earnings has been revised up 6.5% in the past 30 days. Over the past six months, IBCP shares have fallen 14.4%.

Civista Bancshares has also seen a 3% upward revision to its 2022 earnings estimate in the past 30 days. Over the past six months, CIVB shares are down 10.9%.