Customers Bancorp: A "Pedigree" Pick

Focus: FINANCIALS

Douglas Gerlach Image Douglas Gerlach President, ICLUBcentral, Inc.

There are a lot of small, cheap bank stocks. What makes Customers Bancorp (CUBI) stand out is the pedigree of Jay Sidhu, the banks CEO, asserts Doug Gerlach, editor of Investor Advisory Service.


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Over 20 years, Mr. Sidhu grew his previous bank, Sovereign Bancorp, from a tiny bank into one of the largest in the country. Following a dispute with the board, Sovereign was swallowed up in stages by Spain’s Banco Santander.

Although it has total assets of $9.9 billion, Customers has only 14 full-service branches in Pennsylvania and surrounding states. Its emphasis is on business loans rather than consumer loans.

Since 2013, it has been converting to a private banking model for businesses. Customers Bancorp, like Sovereign, makes acquisitions to build its banking footprint. In fact, Customers began when Mr. Sidhu raised capital and bought a failed bank from the FDIC.

One advantage of taking this route is that the FDIC provides guarantees for bad loans at the acquired bank. This allows the acquiring bank to take on customers while minimizing the impact of legacy loan losses that rendered the target insolvent.

In banking, soundness comes before growth. This comes down to evaluating interest rate risk and credit risk. Customers Bancorp appears to have very low interest rate risk. The company’s 10-K filing shows little projected change in net interest income whether interest rates go up or down.

One of our favorite characteristics in a bank stock is interest rate neutrality. When run properly, in our view, a bank should earn a stable net interest margin from loans and securities rather than making bets on the direction of interest rates.

Customers Bancorp’s return on beginning equity has averaged 12%. With no dividend, reinvesting profits at this rate will lead to an earnings growth rate of 12%. Five years of 12% growth would lead to EPS of $4.53.

We approximate the downside risk to be 23% to $22, the low price of 2016. On the upside, the stock price could increase 145% to $69, rising over 19% annually, based on a high P/E ratio of 15.3.

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