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BankUnited Stock Skyrockets 58.1% in Year: Is BKU Worth a Look?
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BankUnited Inc.’s (BKU - Free Report) shares have soared 58.1% in the past year and outperformed its industry. Also, the stock has performed much better than its close peers Bank OZK (OZK - Free Report) and Hilltop Holdings Inc. (HTH - Free Report) .
One-Year Price Performance
Image Source: Zacks Investment Research
Technical indicators also suggest sustained strength for BankUnited. At present, the stock is trading above its 50-day and 200-day moving average, indicating a bullish trend.
50-Day & 200-Day Moving Average
Image Source: Zacks Investment Research
This underscores positive market sentiments and confidence in the company's financial health and prospects.
Factors to Drive BKU Stock
Interest Rate Cuts: The Federal Reserve announced a jumbo 50 basis point cut in interest rates on Sept. 18 and signaled two more rate cuts this year and four in 2025. This is a positive development for banks, including BKU, HTH and OZK.
The banking sector has been reeling under the four-decade high interest rates, which curbed net interest income (NII) and net interest margin (NIM) expansion because of the rise in funding costs. Also, high rates resulted in subdued loan demand.
Thus, BKU’s NII performance weakened over time. The metric witnessed a three-year compound annual growth rate (CAGR) of just 2.8%. Likewise, NIM contracted to 2.56% in 2023 from 2.68% in 2022.
As the interest rates come down, BankUnited is expected to witness a gradual stabilization of funding costs. Further, loan demand is likely to improve. Thus, NII and NIM are expected to increase.
Management projects NII to rise in mid-single-digit to low/high double digits. NIM is expected to reach the high 2% range (higher than the 2.72% reached in the second quarter) by the end of 2024 and improve further in 2025.
Management expects commercial & industrial and commercial real estate loans to grow in the high single-digit range this year, while residential loans are anticipated to shrink further at a similar pace as in 2023.
Strategizing Low-Cost Deposits: Management’s emphasis on the acquisition of low-cost deposits will likely bolster top-line expansion. As of June 30, 2024, non-interest-bearing deposits accounted for 29% of total deposits.
The company anticipates steady growth in the deposits in light of a strengthened pipeline for the same. Further, management aims to improve the deposit mix by gradually increasing the non-interest demand deposit account share to more than 30% over time.
Manageable Debt Level: As of June 30, 2024, the company had a total debt of $4 billion, while cash and cash equivalents were $433.5 million as of the same date, reflecting a strong liquidity position.
Management has been paying down its debt to reduce the interest burden in the second quarter of 2024. The company reduced its FHLB Advances by roughly 16% on a sequential basis.
Further, at the end of the second quarter, its times interest earned and total debt/capital were 1.9X and 54.9%, respectively. This indicates that the company is well-managed to deal with its high debt levels in the near term, even if economic turmoil occurs.
Impressive Capital Distributions: As of June 30, 2024, BKU’s capital ratios were well above the regulatory requirements. Common Equity Tier 1 ratio and a total risk-based capital ratio were 11.6% and 13.6%, respectively.
Since 2022, the company has been hiking its dividend payout annually, with the latest hike announced this February, raising the amount to 29 cents per share. The company has increased its dividend four times in the past five years, with a five-year annualized dividend growth of 6.2%.
Similarly, HTH has raised its dividend five times in the past five years, while OZK increases its dividend every quarter.
Currently, BKU has a 43% dividend payout ratio, which boosts investors’ confidence and enhances shareholder value.
Dividend Yield
Image Source: Zacks Investment Research
BKU also has a share repurchase program in place. As of June 30, 2024, $20.2 million worth of shares remained available under the authorization. Though management is unlikely to pursue buybacks until it sees stability in the economy, the company’s earnings strength is anticipated to help sustain its efficient capital distributions.
Hurdles Faced by BankUnited
Poor Asset Quality: BankUnited’s asset quality has been deteriorating over the past few years. Provision for credit losses witnessed a CAGR of 37.4% over the three years ended 2020. While the company recorded negative provisions in 2021, provisions jumped in 2022 and 2023. The metric is expected to remain elevated in the near term due to the anticipated economic slowdown.
Massive Exposure to Mortgage & Commercial Loans: Though BankUnited has been lowering its exposure to residential mortgage loans, a still large exposure to the same is worrisome. As of June 30, 2024, residential loans constituted 31.9% of the company's total loans. This, along with exposure to commercial real estate loans or CRE (comprising 32.2% of total loans), is a concern. These high-risk loan exposures might hurt the company's financials
Parting Thoughts on BKU Stock
BankUnited’s improving deposit mix, decent loan demand and solid balance sheet are likely to support its financials. Moreover, interest rate cuts have reinforced the company’s current initiative to mitigate funding cost pressures and improve NIM.
However, huge CRE and mortgage loan exposure and deteriorating asset quality are major near-term concerns, which can drag the BKU stock down.
Image: Bigstock
BankUnited Stock Skyrockets 58.1% in Year: Is BKU Worth a Look?
BankUnited Inc.’s (BKU - Free Report) shares have soared 58.1% in the past year and outperformed its industry. Also, the stock has performed much better than its close peers Bank OZK (OZK - Free Report) and Hilltop Holdings Inc. (HTH - Free Report) .
One-Year Price Performance
Image Source: Zacks Investment Research
Technical indicators also suggest sustained strength for BankUnited. At present, the stock is trading above its 50-day and 200-day moving average, indicating a bullish trend.
50-Day & 200-Day Moving Average
Image Source: Zacks Investment Research
This underscores positive market sentiments and confidence in the company's financial health and prospects.
Factors to Drive BKU Stock
Interest Rate Cuts: The Federal Reserve announced a jumbo 50 basis point cut in interest rates on Sept. 18 and signaled two more rate cuts this year and four in 2025. This is a positive development for banks, including BKU, HTH and OZK.
The banking sector has been reeling under the four-decade high interest rates, which curbed net interest income (NII) and net interest margin (NIM) expansion because of the rise in funding costs. Also, high rates resulted in subdued loan demand.
Thus, BKU’s NII performance weakened over time. The metric witnessed a three-year compound annual growth rate (CAGR) of just 2.8%. Likewise, NIM contracted to 2.56% in 2023 from 2.68% in 2022.
As the interest rates come down, BankUnited is expected to witness a gradual stabilization of funding costs. Further, loan demand is likely to improve. Thus, NII and NIM are expected to increase.
Management projects NII to rise in mid-single-digit to low/high double digits. NIM is expected to reach the high 2% range (higher than the 2.72% reached in the second quarter) by the end of 2024 and improve further in 2025.
Management expects commercial & industrial and commercial real estate loans to grow in the high single-digit range this year, while residential loans are anticipated to shrink further at a similar pace as in 2023.
Strategizing Low-Cost Deposits: Management’s emphasis on the acquisition of low-cost deposits will likely bolster top-line expansion. As of June 30, 2024, non-interest-bearing deposits accounted for 29% of total deposits.
The company anticipates steady growth in the deposits in light of a strengthened pipeline for the same. Further, management aims to improve the deposit mix by gradually increasing the non-interest demand deposit account share to more than 30% over time.
Manageable Debt Level: As of June 30, 2024, the company had a total debt of $4 billion, while cash and cash equivalents were $433.5 million as of the same date, reflecting a strong liquidity position.
Management has been paying down its debt to reduce the interest burden in the second quarter of 2024. The company reduced its FHLB Advances by roughly 16% on a sequential basis.
Further, at the end of the second quarter, its times interest earned and total debt/capital were 1.9X and 54.9%, respectively. This indicates that the company is well-managed to deal with its high debt levels in the near term, even if economic turmoil occurs.
Impressive Capital Distributions: As of June 30, 2024, BKU’s capital ratios were well above the regulatory requirements. Common Equity Tier 1 ratio and a total risk-based capital ratio were 11.6% and 13.6%, respectively.
Since 2022, the company has been hiking its dividend payout annually, with the latest hike announced this February, raising the amount to 29 cents per share. The company has increased its dividend four times in the past five years, with a five-year annualized dividend growth of 6.2%.
Similarly, HTH has raised its dividend five times in the past five years, while OZK increases its dividend every quarter.
Currently, BKU has a 43% dividend payout ratio, which boosts investors’ confidence and enhances shareholder value.
Dividend Yield
Image Source: Zacks Investment Research
BKU also has a share repurchase program in place. As of June 30, 2024, $20.2 million worth of shares remained available under the authorization. Though management is unlikely to pursue buybacks until it sees stability in the economy, the company’s earnings strength is anticipated to help sustain its efficient capital distributions.
Hurdles Faced by BankUnited
Poor Asset Quality: BankUnited’s asset quality has been deteriorating over the past few years. Provision for credit losses witnessed a CAGR of 37.4% over the three years ended 2020. While the company recorded negative provisions in 2021, provisions jumped in 2022 and 2023. The metric is expected to remain elevated in the near term due to the anticipated economic slowdown.
Massive Exposure to Mortgage & Commercial Loans: Though BankUnited has been lowering its exposure to residential mortgage loans, a still large exposure to the same is worrisome. As of June 30, 2024, residential loans constituted 31.9% of the company's total loans. This, along with exposure to commercial real estate loans or CRE (comprising 32.2% of total loans), is a concern. These high-risk loan exposures might hurt the company's financials
Parting Thoughts on BKU Stock
BankUnited’s improving deposit mix, decent loan demand and solid balance sheet are likely to support its financials. Moreover, interest rate cuts have reinforced the company’s current initiative to mitigate funding cost pressures and improve NIM.
However, huge CRE and mortgage loan exposure and deteriorating asset quality are major near-term concerns, which can drag the BKU stock down.
Thus, investors should not rush to buy BankUnited stock at the current level. Rather, they should wait for a better entry point. The Zacks Rank of 3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here