Bank of America Downgrades Texas Capital Bancshares Following Merger Announcement

Texas Capital Bancshares Inc TCBI this week announced a merger with its smaller Texas-based peer Independent Bank Group Inc IBTX.

While the announcement was not surprising, the merger pricing is highly disappointing, according to Bank of America.

The Analyst

BofA’s Ebrahim Poonawala downgraded Texas Capital Bancshares from Buy to Neutral, keeping the price target at $66.

The Thesis

Credit and margin related headwinds had impacted Texas Capital Bancshares’ EPS growth and returns, resulting in a massive sell-off in the stock, Poonawala said in the downgrade note.

He added that the merger price reflects these issues, while also indicating that management saw challenges in boosting profitability on a standalone basis.

The combined entity would have the opportunity to deliver superior growth and could position itself as an attractive merger partner for a US or foreign bank, Poonawala mentioned. He added, however, that deal stocks “have generally underperformed.”

“While TCBI should benefit from an improving economic and interest rate outlooks, we see better risk/reward elsewhere to gain exposure to this theme without taking on the deal related execution risk,” the analyst wrote.

Poonawala also said that higher longer-term interest rates could adversely impact Texas Capital Bancshares’ mortgage business, which may affect spread revenue growth “even with the Fed on the sidelines.”

Price Action

Shares of Texas Capital Bancshares were down 1.32% to $60.01 at time of publication Wednesday.