Insights

This Tech-Driven Bank Stock Is Still Dirt Cheap

Since the pandemic began, Customers Bancorp (NYSE: CUBI), a roughly $20 billion asset bank based in Pennsylvania, has seen its stock price more than triple, only to see it then fall back significantly this year along with many other bank and tech stocks. That whole time, the bank has not only performed well, but it has also been rolling out a wide range of new banking products and services that should continue to fuel growth moving forward.

The fact that the market is missing this performance, growth, and expansion leads me to believe Customers Bancorp stock is undervalued. Here’s why.

Customers Bancorp has a growing product set

Customers has some of the most diverse product offerings I’ve seen for a bank of its size. The bulk of the bank’s business is in the commercial space, where it does all sorts of lending, from commercial real estate to multi-family to loans made in partnership with the U.S. Small Business Administration to specialty banking.

Image source: Getty Images.

Specialty banking has been driving a lot of Customers’ loan growth lately, particularly through loans to private equity, venture capital, and other kinds of lenders. Specialty commercial loans grew by $1.6 billion in the second quarter of the year.

Customers continue to work on rolling out other digital lending products for small- to medium-sized businesses, such as revolving term loans, equipment finance loans, and commercial credit cards.

The bank is also ramping up its Customers Bank Instant Token (CBIT), a blockchain-based instant payments platform that enables multiple parties on the platform to send funds to one another. The platform is particularly helpful with crypto trading because cryptocurrencies trade in real-time. Customers is currently ramping up CBIT, which now has 190 customers on it, who have brought more than $2 billion of low- or zero-cost sticky deposits with them to the bank.

The bank also wants to take its real-time payments capabilities further and build a cloud-based treasury product suite for commercial businesses that are powered by application programming interfaces. The suite would offer digital account onboarding, real-time reporting, account payment, analysis, and payments including an automated clearing house, wire payments, foreign exchange, and CBIT. This could be another way for the bank to drive deposits.

Customers Bancorp is continuing to execute

It’s hard to say that Customers isn’t already executing. In the second quarter of the year, the bank generated a return on average common equity of more than 18%, which is really strong. Customers also had an efficiency ratio, which looks at a bank’s expenses expressed as a percentage of revenue (lower is better), of 42%, which is superb.

But in this kind of market, it looks like investors would like to see the bank continue to improve its deposit base. They are also watching credit quality.

Customers has done a good job of growing non-interest-bearing deposits, which the bank pays no interest on, by 73% from one year ago. However, the bank could still do a better job of improving its interest-bearing deposit base and also still has some higher-cost borrowing on the balance sheet.

I expect CBIT will enable Customers to ramp up higher-quality deposits, but with the current crypto winter, they may not come in as fast this year as initially expected. Still, the fact Customers saw any growth in CBIT deposits amid the difficult conditions in the second quarter is good news. I also think the bank can improve deposits as they bring on more small businesses and as they roll out this new digital treasury solutions suite, which could also take some time.

Investors are also likely still monitoring credit quality, considering all of the new loan verticals at the bank. Credit still looks extremely healthy, with non-performing assets down from the first quarter of the year. Net charge-offs, or debt unlikely to be collected, grew in the quarter due to what looks to be an isolated incident and higher charge-offs in Customers’ consumer loan portfolio. The bank does have a $1.9 billion portfolio of installment loans, which investors may be worried about, but these loans were largely made to prime and super-prime borrowers.

Cheap valuation by all metrics

Customers is doing a lot of new things right now, and while performance is quite strong, investors probably want to make sure that it is not a fluke and that management will execute on all of these initiatives. It’s also a very difficult market, and Customers seems to have been swept in with other tech and crypto stocks that have pulled back heavily this year. 

But by all metrics, the bank’s stock looks cheap. Management still expects to generate $4.75 to $5 of core earnings this year, which means the stock trades at less than eight times projected 2022 earnings. Management also expects to grow tangible book value, or its net worth, to $40 per share by the end of the year, which means the bank is currently trading below what management expects to be its tangible book value in less than six months.

Customers still has a lot of work to do and a lot to prove, but the bank has generated strong results in recent quarters, and its new products look to be off to a good start. I like the stock at this valuation.

Bram Berkowitz has positions in Customers Bancorp. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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