UMB Financial's Bright Horizon: Analyst Foresees NII Surge In 2H Amid Rising Loan Yields

Piper Sandler analyst Nathan J. Race upgraded UMB Financial Corporation UMBF to Overweight from Neutral, with a price target of $74.

With fewer, if any, additional Fed rate hikes expected going forward, the analyst believes UMBF can generate superior NII growth in 2H23 and 2024 with ongoing expansion in loan yields.

The analyst adds that UMBF boasts an enviable mix of differentiated fee income businesses (35% of LTM revenue vs. peers at 19%) that have generated above-average growth historically, including 19% YoY in 2Q23 (vs. peers at -4%). 

Race expects UMBF's continued strong fee income growth prospects to contribute to UMBF's superior trajectory in overall revenue.

The analyst models the company's core fee income at $543 million and $546 million for 2023 and 2024, which equates to YoY growth of 11% and 1%, respectively. 

Race sees redeployment of ~$300 million in quarterly securities cash flow run-off, and less upward deposit cost pressure from UMBF's ~35% indexed funding base. 

The analyst's NII growth estimates for 2023 are modestly above consensus.

Race thinks UMBF has proven to generate superior organic growth in both loans and core deposits via share gains and its more unique business mix.

While UMBF has experienced lumpy NCOs in certain quarters over the past several years, the analyst believes these events have better prepared UMBF for an industry-wide credit cycle and enhanced its asset quality infrastructure, monitoring, and underwriting. 

Unlike a number of peers, UMBF should see some operating expense relief in 2H23 with 3Q23 guidance of ~$230 million vs. $236 million in 2Q23. 

While certain business re-investments remain ongoing, UMBF has proactively expensed several more significant items during prior quarters to position the company for continued above-average total revenue growth, the analyst adds. 

The analyst's 3Q23 operating expense estimate of $233 million is slightly more conservative than the guidance coming out of 2Q23.

For 2023 and 2024, Race forecasts 6% and 3% YoY operating expense growth, respectively.

These apart, the analyst believes UMBF's less capital-intensive business mix and strong capital base bode well to gain greater market share as larger bank competitors potentially pull-back from certain areas amid ongoing RWA adjustments.

Price Action: UMBF shares are trading higher by 3.19% to $63.84 on Wednesday.