The $19 billion asset Customers Bancorp (CUBI 0.46%), based in Pennsylvania, continues to impress as the bank executes its niche banking and technology-driven strategy. In the first quarter of 2022, Customers reported diluted earnings per share of $2.18 on total revenue of nearly $186 million, both numbers that beat analyst estimates in the quarter. Customers' profitability in the quarter translated to a return on common equity of 24.26% and a return on assets, which shows how well a bank uses assets to generate earnings, of 1.63%. As far as the banking industry goes, both of these numbers are considered very good. I believe this stock presents a great opportunity, trading around six times forward earnings. Here's why.
A great transformation
When current leadership took over Customers Bancorp in 2009, the bank was struggling and very small. Management has grown assets very quickly over the last decade-plus and introduced strong technology and a diversified product set, all of which have begun to pay dividends.
Customers' product set includes all of the regular community banking products, as well as specialty lending verticals, including tech and venture capital banking, healthcare lending, specialty finance, and consumer lending. Customers has also worked to build out its digital capabilities, specifically for small- and medium-sized businesses.
The bank has a digital loan platform specifically for loans it makes in partnership with the U.S. Small Business Administration (SBA), in which the SBA guarantees a large majority of a business loan issued by a bank to a riskier business. On this platform, borrowers can apply for loans of $350,000 or less, receive a decision, and close in 30 days, which is very quick in the SBA world. During the pandemic, the power of this platform took flight, as Customers originated more than $10 billion of Paycheck Protection Program (PPP) loans, which are built on the foundation of the SBA program. The bank is working to offer new digital lending products for its small- and medium-sized business clients.
Customers has also built a real-time payments platform called the Customers Bank Instant Token (CBIT), which allows multiple parties to instantly clear and settle transactions between one another. Although it will eventually have many use cases, a big one right now is for large cryptocurrency exchanges and institutional crypto traders. While cryptocurrencies trade around the clock, the U.S. doesn't operate on a real-time payments network. The bank has successfully rolled out this product, which is helpful because the large institutional customers that are onboarded to the platform bring large sums of non-interest-bearing deposits to the bank. Customers has also made good progress in running down higher-cost deposits. All of this will be helpful as the Federal Reserve raises interest rates, which eventually leads to increased deposit costs.
Why Customers is well positioned
Customers looks extremely attractive right now, whether it's due to trading at just six times forward earnings or roughly 116% to its tangible book value, essentially its net worth. Most banks putting up returns like Customers are trading at a much higher valuation.
Now, investors may be looking at the stock cautiously for a few reasons. For one, Customers has a large portfolio of personal loans with an outstanding balance of $1.8 billion. Borrowers of these loans can struggle in a rising-rate environment and if the economy tips into a recession. Management on the bank's recent earnings call said they do not plan to grow balances in this vertical right now. Furthermore, fees from PPP loans have been inflating Customers' earnings, with the bank earning hundreds of millions in fees in recent quarters (about $60 million remain to be recognized this year). Finally, many of the bank's new products are relatively new, so investors may want more proof that they will be successful.
But future earnings look extremely promising. Management is guiding for low double-digit percentage loan growth across all of its loan verticals, excluding mortgage banking, in 2022. This, combined with the Fed continuing to raise rates, should significantly boost loan revenue. Also, the bank should be able to further improve its deposit base as CBIT ramps up. Management has guided for several billion of deposit inflows this year, most of which should be either zero cost or very low-cost deposits.
Management also said they expect to achieve well over $6 of earnings in 2023, excluding PPP fees. The stock trades at roughly seven times core 2023 earnings, assuming just $6 in earnings per share. Considering all of the good things happening at Customers, I continue to believe the bank can achieve this guidance, which makes me very bullish on the stock.