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Morningstar | Cullen/Frost Is One Of the Highest-Quality Regional Banks

Cullen/Frost is the largest Texas-based bank and prides itself on knowing the Texas market better than anyone else. It has implemented a relationship-based approach to banking that has garnered strong loyalty in its customer base, which is largely small to medium sized Texas based commercial clients. We think that the relationships Cullen/Frost has built up, often times over generations, along with the bank’s consistent approach to conservative underwriting will serve it well in the years to come. The great strength of Cullen/Frost's approach is the strict adherence to its long-term strategy to attract high-quality borrowers and retain them with uniquely personal service. The bank often says that it doesn’t bank industries or businesses, it banks people. Tight relationships provide the bank with insight into the Texas environment that it can leverage to advise all clients and deepen its business relationships. The bank also has a history of surviving when other banks have failed, such as during the S&L and energy crises of the 1980s that led to the demise, through bankruptcy or acquisition, of every other top-10 Texas bank during that period. In addition, Frost exited retail mortgage lending in 2000. As a result, it was one of the first banks in the U.S. to turn down Troubled Asset Relief Program funds during the financial crisis. The most recent example of this would be how well the bank has navigated the energy downturn, despite having 100% Texas exposure and one of the highest energy exposures under our coverage.The story of Cullen/Frost is nothing if not of consistency. While the bank is tinkering with some strategies over the medium term, such as refocusing on bringing additional growth to its retail banking franchise and pushing for more smaller commercial loans, we believe consistency of results and of focus will remain. The bank remains, arguably, overcapitalized, leaving room for growth as opportunities present themselves. Rising rates should help net interest margins expand with a majority of its book being adjustable rate, and we believe the bank can approach a steady return on tangible equity of 17%-18% through the cycle.