Bancorp Customers (NYSE: CUBI), a $20 billion bank in Pennsylvania, saw its stock price rise about 260% in 2021. But I still think this one might just be getting started given all the banking capabilities and digital payments that the bank is currently implementing. Here’s why.
Digital SME platform
You won’t see too many banks rolling out the amount of innovative digital and niche banking products that is Customers Bank. In one area, the bank has created a digital lending platform for small and medium-sized enterprises (SMEs) in which the entire underwriting and funding process is fully automated. The first product offered through the platform is loans through the U.S. Small Business Administration’s (SBA) 7(a) program, in which banks partner with the government to extend financing to small businesses. more risky. The platform allows borrowers to apply for loans up to $350,000 and get a decision and close the loan in less than 30 days, which is incredibly fast and efficient in the SBA world.
The bank demonstrated the power of this platform when the Paycheck Protection Program (PPP) was created at the start of the pandemic to help struggling small businesses. The PPP program was based on the SBA loan program. Customers Bank has issued more than $10 billion in PPP loans in total, which is a ton for a bank of its size. Consider that Bank of America totaled $34.5 billion in PPP loans, but is also about 140 times the size of customers when you compare total assets.
Having a fully automated lending platform is a big deal because when a human is involved in the loan origination process, it makes the cost of issuing that loan more expensive, which ultimately makes it difficult for banks to lend to small businesses because they are less profitable. . As a result, many small businesses are unable to access traditional business financing from a bank and typically resort to a personal loan or credit card if they need quick access to cash. With its fully automated origination platform, Customers Bank sees a great opportunity to serve small businesses looking for that smaller financing with a revolving line of credit or similar financial product. This then creates opportunities for the bank to develop a custodial relationship with that borrower and continue to serve the borrower as the business grows. Customers strive to bring former and current PPP customers to the platform.
Real-time payments and more
Another niche sought by Customers is that of real-time payments. The bank has developed the Customers Bank Instant Token (CBIT), which allows any business customer of the bank to instantly send and clear payments between them. The system is similar to real-time payment systems developed by Silvergate Capital and Signature Bank. The most common use case for these systems is to better facilitate crypto trading between institutional traders and crypto exchanges, because cryptocurrencies trade all the time and the United States does not operate on a system real-time payment. But customers are seeing other industries where CBIT can be used, including real estate, healthcare and payers, and freight and shipping, among others.
Customers are also wading into other vertical niches. The bank partners with niche fintech lenders like Reached, Prosper and Upgrade to issue installment loans, and the bank recently crossed $1.7 billion in issues. Additionally, customers have recently launched a banking-as-a-service (BaaS) program that enables non-banking fintech companies to offer more traditional banking services, be it a card program, cash management accounts or lending capabilities.
Clients then move into other commercial lending niches, such as technology and venture capital banking, where they provide short-term funding to private equity and venture capital funds so that they can quickly execute trades. It can be a very successful company and it actually did quite well during the height of the pandemic, when loan growth was harder to come by.
Rapid growth is coming for customers
All of these new verticals are going to help customers scale quickly. In 2019, Customers was only around $10 billion in assets – now it’s double that. CBIT is going to help the bank continue to grow deposits because customers who use the platform are bringing large sums of deposits, and these are good deposits on which the bank will pay very little or no interest. In just two quarters, CBIT has already brought in nearly $2 billion in deposits from approximately 25 customers using CBIT. Now, the bank plans to pull the service out of soft launch and start adding customers more aggressively, which should, in turn, increase deposits more aggressively. Additionally, customers will also be able to use CBIT’s low-cost deposits to reduce its overall deposit costs, which will help increase the bank’s overall margins.
On the loan side, management has guided loan growth of $300 million to $500 million per quarter, which could mean loan growth in the double-digit percentage range this year. Management also expects each of its new lending verticals to grow into at least a $1 billion line of business over time.
PPP loans have boosted earnings, but even without them, management expects basic earnings per share (EPS) to be between $4.75 and $5 this year and then top $6 in 2023. Analysts said expect EPS to average $6.78 this year. then $6.52 on average in 2023. There will still be some PPP earnings assistance this year and in 2023. Trading around $59 per share, Customers shares are trading at around 8.7 times projected earnings of this year and 9 times projected earnings for 2023, although again base revenues are likely lower due to PPP.
Another way to value bank stocks is based on their tangible book value, which is what a bank would be worth if it went into liquidation. Client shares are currently trading at approximately 158% of tangible book value. If you look at banks that have been successful in the real-time payments space and digital small business banking like Silvergate Capital, Signature Bank and Live Oak Bancshares, they trade at 200% to 350% of tangible book value. These companies are a bit more advanced and Customers still has a lot to do, but I think investors can look to those higher valuations as something Customers could possibly achieve if they keep executing.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.