Like many stocks during the pandemic, Customers Bancorp (CUBI), a roughly $20 billion asset bank based in Pennsylvania, went on a big run. Its shares rose from about $18 entering 2021 all the way to more than $74 in early 2022.
And also like many stocks this year, Customers has been sold off sharply, now trading for less than $32. That means Customers’ stock now trades below its tangible book value or net worth.
Despite the sell-off, the bank’s performance continues to be rock-solid, and management continues to ramp up new product niches that have great promise of generating strong returns down the line. I think the market is sleeping here, and that now’s the time to buy.
A top tech bank
There are thousands of banks in the U.S., but Customers’ management team believes it is a top 10 tech bank in the country. While it’s still building out a lot of different initiatives, the bank has launched a number of niche businesses that you might not see at your traditional lender.
It has a ton of specialty banking services, including specialty realty finance, a broad consumer banking portfolio, and venture capital banking, to name a few. Customers has also been building a digital banking platform for small to medium-sized businesses that it used during the pandemic to make PPP loans. It eventually wants to enable these smaller businesses to be able to apply online quickly and seamlessly and get revolving lines of credit, term loans, and business credit cards with fast decision-making.
Customers is also wading into the world of payments with its blockchain-based Customer Bank Instant Token (CBIT), which has real-time payment capabilities specifically aimed at facilitating crypto trading between institutional clients and crypto exchanges. Additionally, Customers hopes to use similar technology to build a treasury and payments platform to help make the lives of their commercial customers easier.
Finally, Customers is in the process of rolling out banking-as-a-service, where it can partner with fintech companies to help them originate and service loans, manage deposits, and provide potential payments capabilities.
Current headwinds
Customers does face some near-term headwinds from rising deposit costs and likely decline in credit quality. The bank’s cost of deposits has now risen from 0.42 percentage point toward the end of 2021 to 1.42 percentage points at the end of the third quarter.
CBIT helps to offset some of the funding cost increase because it brings lots of customers to the bank who hold large sums of non-interest-bearing deposits, which the bank doesn’t pay any interest on. But this source of funding is currently facing some challenges amid the crypto winter.
Still, the bank onboarded 111 customers to CBIT during Q3, and I would expect this to be a great source of cheap deposits for Customers once the crypto winter ends. Some of the new loan verticals Customers is in the early stages of rolling out also have good pipelines of core deposits, according to management.
Investors may also have some questions regarding credit, largely because of Customers’ consumer installment loan portfolio. But Customers sold $500 million of these consumer loans in the quarter to help reduce portfolio risk — and did so almost at the loans’ face values, despite the large increase in interest rates this year. Customers still has roughly $1.4 billion of these loans on its balance sheet, but the portfolio’s average FICO score is strong at 736.
Customers did see probable loan losses tick up in the third quarter, but it seems to have adequate reserve coverage for future potential losses.
Buy Customers at this bargain value
Investors can certainly consider Customers a show-me story, but the bank has made tangible progress on many of these new initiatives and is already putting up extremely attractive returns.
In Q3, the bank generated a 19.3% return on common equity and a 1.24% return on average assets, both higher than industry averages. Furthermore, the bank has already achieved core earnings of $5.15 per share through Q3, which is beyond what management initially forecast for the full year.
With the stock currently below $32, Customers trades at less than 5 times core 2022 earnings if you annualized core earnings through Q3. It also trades at just 87% of its tangible book value, an extremely cheap valuation.
Management said it will go through with the bank’s full 2 million share repurchase authorization over the next few months if the stock continues to trade at such a discount. I would hop on board before this happens.
— Bram Berkowitz
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Source: The Motley Fool