Texas Capital Bank has been treading water for the past six months, recording a small return of 4.1% while holding steady at $90.55.
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Why Is Texas Capital Bank Not Exciting?
We're sitting this one out for now. Here are three reasons we avoid TCBI and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Markets consistently prioritize net interest income over non-recurring fees, recognizing its superior quality compared to the more unpredictable revenue streams.
Texas Capital Bank’s net interest income has grown at a 3.9% annualized rate over the last five years, much worse than the broader banking industry and in line with its total revenue. Its growth was driven by an increase in its net interest margin, which represents how much a bank earns in relation to its outstanding loans, as its loan book shrank throughout that period.
2. Projected Net Interest Income Growth Is Slim
Forecasted net interest income by Wall Street analysts signals a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Texas Capital Bank’s net interest income to rise by 4.1%, a slight deceleration versus its 6.1% annualized growth for the past two years.
3. Previous Growth Initiatives Haven’t Impressed
Return on equity (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.
Over the last five years, Texas Capital Bank has averaged an ROE of 7.4%, uninspiring for a company operating in a sector where the average shakes out around 7.5%.
Final Judgment
Texas Capital Bank isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 1.1× forward P/B (or $90.55 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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