Customers Bancorp (CUBI 2.69%), a $20 billion bank in Pennsylvania, saw its stock price rise about 260% in 2021. But I still think this one could just be getting started given all of the digital banking and payments capabilities the bank is currently in the process of implementing. Here's why.
Digital SMB platform
You won't see too many banks rolling out the sheer amount of innovative digital and niche banking products that Customers Bank is. In one area, the bank has created a digital lending platform for small- and medium-sized businesses (SMBs) in which the entire underwriting and funding process is fully automated. The first product offered through the platform are loans through the U.S. Small Business Administration's (SBA) 7(a) program, in which banks partner with the government to extend funding to riskier small businesses. The platform enables borrowers to apply for loans of up to $350,000 and get a decision and close the loan in under 30 days, which is incredibly fast and efficient in the SBA world.
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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 predicated on the SBA loan program. Customers Bank originated more than $10 billion of total PPP loans, which is a ton for a bank its size. Consider that Bank of America did a total of $34.5 billion of PPP loans but is also about 140 times the size of Customers when you compare total assets.
Having a fully automated loan platform makes a big deal because when a human is involved in the loan origination process, it makes the cost of originating that loan more expensive, which ultimately makes it difficult for banks to make smaller business loans because they are less profitable. As a result, many small businesses are not able to access traditional commercial financing from a bank and typically will resort to a personal loan or credit card if they need quick cash access. With its fully automated origination platform, Customers Bank sees a big possibility to serve small businesses seeking this smaller financing with a revolving line of credit or a similar financial product. This then creates possibilities for the bank to expand into a depository relationship with that borrower and continue to serve the borrower as the business grows. Customers is working to bring former and current PPP customers onto the platform.
Real-time payments and more
Another niche that Customers is pursuing is real-time payments. The bank has developed the Customers Bank Instant Token (CBIT), which enables any of the bank's commercial clients to send and clear payments instantly between one another. The system is similar to the 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 at all times and the U.S. doesn't operate on a real-time payments system. But Customers sees other industries that CBIT can be used for including real estate, healthcare and payers, and freight and shipping among others.
Customers is also wading into other niche verticals. The bank partners with niche fintech lenders like Upstart, Prosper, and Upgrade to originate installment loans, and the bank recently crossed $1.7 billion of originations. Additionally, Customers recently launched a banking-as-a-service (BaaS) program that enables nonbank fintech companies to offer more traditional banking services, whether that is a card program, cash management accounts, or lending capabilities.
Customers is then launching into other niche commercial lending areas, like tech and venture capital banking, in which it provides short-term financing to private equity and venture capital funds so they can execute on deals quickly. This can be a high-performing business and actually performed quite well during the brunt of the pandemic when loan growth was harder to come by.
Fast growth is coming for Customers
All of these new verticals are going to help Customers grow quickly. In 2019, Customers was only around $10 billion in assets -- now it's double that. CBIT is going to help the bank keep growing deposits because customers that use the platform bring large sums of deposits, and these are good deposits that the bank will pay very little or no interest at all on. In just two quarters, CBIT has already brought in nearly $2 billion of deposits from about 25 customers using CBIT. Now, the bank plans to bring the service out of soft launch and start adding clients more aggressively, which should, in turn, grow deposits more aggressively. Additionally, Customers will also be able to use the low-cost deposits from CBIT to bring its overall deposit costs down, which will help boost the bank's overall margins.
On the loan side, management has guided for 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 over time to become at least a $1 billion business line.
PPP loans provided a boost to earnings, but even without them, management is guiding for core earnings per share (EPS) to come in between $4.75 and $5 this year, and then to exceed $6 in 2023. Analysts on average expect $6.78 EPS this year and then $6.52 on average in 2023. There will still be some earnings help from PPP this year and in 2023. Trading around $59 per share, Customers stock trades at about 8.7 times this year's projected earnings and 9 times projected 2023 earnings, although again core earnings are likely smaller 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 were liquidated. Customers stock currently trades around 158% tangible book value. If you look at banks that have succeeded in the real-time payments space and in digital small business banking like Silvergate Capital, Signature Bank, and Live Oak Bancshares, they trade at 200% to 350% to tangible book value. These companies are a little further along, and Customers has a good deal of execution ahead, but I think investors can look at these higher valuations as a target that Customers could eventually reach if it keeps executing.
