Capitol Federal Financial Stock: Weak Positioning (NASDAQ:CFFN)
Capitol Federal (CFFN) is a savings company based in Topeka, KS. The bank serves the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas, and part of the greater Kansas City metropolitan area. Capitol Federal is a typical savings with a significant amount of loans tied to residential mortgages, a highly commoditized product. The bank relies heavily on rate-sensitive CDs to fund a highly commoditized product, and the NIM is compressed to 1.9% for FY21. the singular orientation of the bank is not exciting.
From a profitability perspective, the bank is a significant laggard among its banking peers, consistently earning less than 1% on assets. The efficiency ratio is sensitive to rate variations since the bank’s main source of income is related to residential mortgage loans. Given the bank’s limited willingness to review its core strategy, future profitability is likely to remain problematic.
Credit quality is strong for residential mortgages, a commoditized product. Given the benign real estate cycle, the credit loss is moderate.
The stock price is high at 19x P/E and 1.2x P/TBV. The bank has not earned the average market ROA for a very long time. Given the size of the balance sheet, growth will be moderate unless the bank decides to pivot through acquisition. The only acquisition in fiscal 2018 did not help the bank diversify its loan portfolio. The bank’s growth prospects are somewhat limited given the concentrated portfolio it currently operates.
From a risk perspective, residential mortgage underwriting is a commoditized industry.
From a compensation perspective, growth will be limited, both organically and through acquisitions. The bank’s particular focus on residential mortgage lending makes it difficult for the bank to diversify its capital deployment business going forward.
In summary, the bank is significantly under-exploiting its potential. The use of CD means that the management team will always play the “fundraising game”. Individual loan portfolios make it difficult to pivot. A lack of successful acquisition and lending experience makes diversification difficult, and therefore organic growth and growth by acquisition will be ruled out. The evaluation is not convincing, if not too expensive. Growth prospects will be limited given the bank’s size at $9 billion and wanted to avoid additional regulation as a bank over $10 billion. We don’t like the risk/reward ratio and view any investment as unattractive.