Commerce Bancshares, Inc CBSH is well-placed for revenue growth on the back of steady loan demand and strong fee income. Higher interest rates and a strong balance sheet position will continue to support its financials. However, elevated expenses and weak asset quality pose major near-term concerns.

Commerce Bancshares is expanding organically. The company’s revenues witnessed a five-year (2018-2023) compound annual growth rate (CAGR) of 3.5% despite recording a decline in 2020. The upside was primarily driven by solid loan balances (which witnessed a CAGR of 4% over the four-year period ended 2023) and strength in fee income sources.

Decent loan demand and solid non-interest income performance will continue to aid CBSH’s top-line growth. For 2024, we estimate total revenues to decline 1.2%. However, it will rebound and grow 2.8% and 1.7% in 2025 and 2026, respectively. The loan balance will rise 3.6% in 2024.

With the current high interest rate environment, Commerce Bancshares’ net yield on interest-earning assets is likely to improve in the upcoming quarters. In 2023, the metric expanded to 3.16% from 2.85% in 2022 and 2.58% in 2021. However, rising funding costs will put some pressure on it. We expect the metric to be 3.16%, 3.22% and 3.25% in 2024, 2025 and 2026, respectively.

However, CBSH’s non-interest expenses have witnessed a persistent rise, with a CAGR of 4.8% over the last five years (2018-2023). The rise was mainly due to higher salaries and employee benefit costs. Overall expenses are expected to remain elevated as the company invests in technology upgrades amid inflationary pressure. We expect non-interest expenses to rise 5.2%, 3.5% and 1.3% in 2024, 2025 and 2026, respectively.

Commerce Bancshares' asset quality has deteriorated over the past few years. While the bank recorded a provision benefit in 2021, provision for credit losses rose substantially in 2022 and 2023. The overall provisions are expected to remain elevated in the near term as the company continues to build reserves to combat the tough operating environment. We expect provision for credit losses to jump 36.2% in 2024.

CBSH currently carries a Zacks Rank #2 (Buy). Shares of the company have gained 7.5% over the past three months compared with the industry’s growth of 10.5%.

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Other Stocks to Consider

Some other top-ranked bank stocks are First Busey Corporation BUSE and Independent Bank Corporation IBCP.

First Busey’s earnings estimates for the current year have slightly moved north in the past 30 days. The company’s shares have gained 4.3% over the past three months. At present, BUSE sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Independent Bank’s 2024 earnings estimates have been revised upward by 4.3% in the past 30 days. The stock has gained 10.2% over the past three months. Currently, IBCP also sports a Zacks Rank #1.

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