The $20 billion asset technology-forward lender Customers Bancorp (CUBI -0.56%) saw its stock struggle immensely in 2022 after a big year in 2021. The stock is now down more than 50% over the last year and trades at just 74% of its tangible book value, or net worth.
The bank has struggled due to near-term headwinds this year, particularly as it relates to its funding costs, which soared higher in the fourth quarter. Following its fourth-quarter earnings results, the stock fell a whopping 20%.
While the market may have given up on Customers, the bank still plans to generate solid returns this year, and management has never been more bullish on the stock. Here's why.
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Near-term headwinds
First, I want to explain why investors have been selling the stock, because there is obviously a reason. Customers has branched out into several niche banking areas, including its specialty and corporate commercial and industrial division, which includes fund financing to the private markets, mortgage warehouse lending, real estate specialty finance, and tech and venture capital call lending. The bank also has a real-time payments network and is working to develop its banking-as-a-service vertical and further digital lending capabilities to consumers and small businesses.
But while Customers has a lot of promising business verticals, the bank's deposit base is much less impressive, and deposits are one of the main things bank investors focus on, especially in the current rising-interest rate environment. In the fourth quarter, Customers saw the cost of its total deposits rise to 3.17%, up from 1.82% in the third quarter. The bank also saw a decline of $731 million in its valuable noninterest-bearing deposits in Q4.
Now, all banks are currently dealing with fast-rising deposit costs, but this is definitely a bigger jump. Customers has significantly expanded its core deposits in recent years, but the bank is still too reliant on higher-cost funding sources.
I am also concerned about how deposits gathered by the Customers Bank Instant Token (CBIT), the bank's real-time payments network, will trend this year, given that the main use case for this tool right now is deposits used for crypto trading. Other banks running similar platforms have seen huge deposit outflows as crypto has tanked. The somewhat good news is that Customers is still very early in building this platform up.
Customers Bank CEO Sam Sidhu said on the bank's recent earnings call that CBIT actually added $400 million of deposits and was up to $2.3 billion of deposits at the end of 2022. But if these deposits, which are typically very low cost, were suddenly to decline significantly, they would be difficult for the bank to replace. I do think CBIT will create value long term as other industries delve more into real-time payments.
The market is still too harsh
While deposit headwinds are real, I think they are more than priced in, given the discounted valuation of the stock.
The bank expects its net interest margin to further contract in 2023, as it focuses less on growth and more on improving its deposit base and balance sheet. But I don't think this is such a bad idea, given the growth Customers Bancorp has experienced in recent years. Additionally, Customers is still expecting to generate core earnings per share of $6 for the year at the low end of its guidance, meaning the stock trades at less than 5 times 2023 core earnings.
The bank also expects to aggressively repurchase shares this year while it trades below tangible book value. This is ultimately the best time to repurchase because the repurchases will end up growing tangible book value, which bank stocks trade relative to.
Sidhu said on the earnings call: "While a share buyback is typically lowest in our waterfall of capital actions, we want to reiterate that we are committed to materially improving our valuation by moderating our growth, focusing on capital, profitability, and funding costs, all while buying back stock, likely aggressively. We plan to begin buying soon, as soon as our trading window opens on Monday."
The bank is guiding for the repurchase of at least 1.9 million shares, which is more than double the amount it bought back in 2022, and it has enough excess capital to buy back more if it wants. Management is telling the market they think its stock is undervalued, and I would have to agree.
