Banking & Finance

Analyst's 4 Top Texas Bank Stocks May Be the Best 2018 Buys

The financials as a whole have had an incredible year, and they especially took off big-time last year following the presidential election. The reality is that most of the big money center banks are very close to or fully valued, and while they are poised to benefit from the new tax plan and deregulation, they will need to post huge earnings to continue higher.

A new SunTrust Robinson Humphrey research report makes the case that the place for investors looking to own bank stocks may be those in Texas, and with good reason. The economy is large and on good footing, people are pouring into the state for technology and other jobs, and the firm cites additional factors at play:

We are incrementally more positive on Texas loan growth particularly in Houston, an M&A acceleration, asset quality stability in energy loans and limited impacts from Hurricane Harvey. We continue to recommend buying Texas bank stocks and we remain optimistic surrounding the solid growth dynamics in the state and limited credit issues. Loan demand in Houston has improved and the negative credit impacts from Hurricane Harvey appear limited. After a slower mergers and acquisitions environment following the energy downturn, we believe M&A activity is accelerating with many interested buyers in both growth and deposit franchises. Deposit pricing has increased, but most banks remain asset sensitive.

These four banks are big players in Texas could be big winners for investors. All four are rated Buy at SunTrust.

Cullen/Frost Bankers

This bank has long been a big player in the Texas market and looks poised for an outstanding 2018. Cullen/Frost Bankers Inc. (NYSE: CFR) is one of the largest independent bank holding companies headquartered in Texas and is currently ranked fifth in terms of deposit market share in the state. The company provides a broad array of products and services throughout numerous Texas markets.

The SunTrust team has been partial to this company for some time and here’s why:

The company’s strong corporate culture is somewhat underappreciated by investors. Every year, the CEO visits every branch from late November to late December. This enables management to get more information on the ground and directly speak to employees’ concerns. CEO Phil Green also spends about 32 days per year on customer development calls. The bank will continue to ensure the company has a value proposition by making needed technology and personnel investments.

Shareholders are paid a 2.38% dividend. The SunTrust price target is $116, and the Wall Street consensus target is $103. The shares traded early Tuesday at $96.00.

LegacyTexas Financial

Based in Texas, this bank does business in one of the country’s thriving areas. LegacyTexas Financial Group Inc. (NASDAQ: LTXB) is the holding company for LegacyTexas Bank, a commercially oriented community bank based in Plano, Texas. The company operates 48 banking offices in the Dallas/Fort Worth Metroplex and surrounding counties.

While the SunTrust estimates are in line with the consensus, the analyst sees numerous positives that could bring the bank in above consensus. The firm cites the greater acquisition related cost reductions, higher loan growth from the very robust Dallas market and elevated mortgage finance volumes. SunTrust also thinks accelerating stock buybacks could contribute.

Loan growth continue to be a plus, and the analysts said:

Loan production remains strong and is more than offsetting payoffs and paydowns. With a larger balance sheet now and greater deposit growth needs, we expect the percentage loan growth to decelerate slightly from the historically targeted mid-teens rate. The primary delta will likely be driven by a more conservative stance towards larger commercial and industrial loans due to recent experience in healthcare and energy SNCs.

Shareholders are paid a 1.5% dividend. The $47 SunTrust price target compares with the consensus target of $44.94. Shares traded at $43.00 Tuesday morning.

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