Rising Costs Curb Hilltop Holdings' Profits: Time To Sell?

On Jan 4, we issued an updated research report on Hilltop Holdings HTH. The company's elevated expense levels and continuous rise in the same, is likely to affect the bottom-line growth. Further, deteriorating performance of its Mortgage Origination segment due to continued fall in loan origination volume is expected to hurt the financials in the quarters ahead.

However, the company is likely to witness higher interest income and easing margin pressure owing to the improving rate environment and an increase in loan demand.

The Zacks Consensus Estimate for 2017 earnings has remained stable over the last 60 days. However, the same for 2018 have been revised 1% downward over the same time frame. As a result, Hilltop Holdings currently carries a Zacks Rank #4 (Sell).

Shares of Hilltop Holdings have lost 15% in 2017 against the industry's gain of 3.2%.

Given the concerns surrounding the company and downward estimate revisions, we believe the stock has limited upside potential.

Economic volatility has drastically undermined Hilltop Holdings' earnings potential. This has deteriorated not only the company's underwriting capabilities at NLC but also its cash position. Further, the company's non-interest expenses have been witnessing a constant rise. Though expenses decreased marginally in 2017, it recorded a three-year (2014–2016) CAGR of 21% mainly due to significantly higher compensation and benefits costs. Overall expenses are also anticipated to remain high because of continued investments in franchise.

Furthermore, Mortgage Origination segment's (23.5% of total income before income taxes during the first nine months of 2017) performance remains a matter of concern. While the segment had been performing decently for the last few years, mortgage volumes have been declining since the fourth-quarter of 2016 mainly due to the interest rate hikes. In 2017, mortgage loan origination volumes were down 6.2% on a year-over-year basis. Moreover, the company expects a similar trend to continue in 2018.

Nevertheless, the pressure on Hilltop Holdings' net interest margin (excluding purchase accounting adjustment) has been easing gradually with an improving rate environment. Although NIM witnessed a declining trend over the past few years, the same improved in 2016 and also during the first nine months of 2017. With the improvement in loan demand and expectations of rate hikes in the future, margins are anticipated to improve further.

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