Auswide Bank Merger And Digital Banking Will Increase Operational Efficiency

Key Takeaways

• Merger with Auswide Bank expands MyState's scale and reach, enabling growth and efficiency improvements.
  
• Technology investments and enhanced customer services could reduce costs and boost net margins and profitability.
  
• Strategic integration and competition pressures, coupled with rising costs, challenge MyState's net margins, profitability, and shareholder value.

Catalysts

Through its subsidiaries, provides banking, trustee, and managed fund products and services in Australia.

• The merger with Auswide Bank significantly increases the scale, capital base, and geographic footprint of MyState, providing opportunities for future revenue growth and operational efficiency improvements.
  
• The newly launched mobile app and Internet banking platform enhance the customer experience and streamline lending processes, potentially reducing costs and improving net margins in the long term.
  
• The anticipated annual pretax cost synergies of $20 million to $25 million from the merger over three years are expected to enhance earnings growth as these synergies materialize.
  
• Improving customer service speed and experience, resulting in record loan applications, suggests potential acceleration in loan growth, likely boosting revenue.
  
• Strategic investments in technology and digital processes are expected to drive operational efficiencies, potentially enhancing net margins and overall profitability.

MyState Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MyState's revenue will grow by 22.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 26.7% in 3 years time.
• Analysts expect earnings to reach A$75.0 million (and earnings per share of A$0.42) by about May 2028, up from A$33.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, down from 19.3x today. This future PE is greater than the current PE for the AU Banks industry at 13.6x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.

MyState Future Earnings Per Share Growth

Risks

• The merger with Auswide Bank is expected to incur pretax integration costs of around $29 million over two years, which could pressure net margins and short-term earnings.
  
• Competition in the home loan market and retention-related activities are impacting net interest margins, which decreased by 1 basis point during the first half, potentially affecting profitability.
  
• Operating expenses increased due to higher personnel costs and strategic investments in technology, which may further impact net margins if revenue growth does not keep pace.
  
• Elevated loan book runoff due to fixed-rate maturities presents a sector-wide challenge, potentially limiting loan growth and constraining overall revenue.
  
• Return on equity is declining, from 7.7% to 7.5%, indicating challenges in maximizing shareholder value and potentially signaling ineffective capital deployment or operating inefficiencies.

Valuation

• The analysts have a consensus price target of A$4.815 for MyState based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$281.0 million, earnings will come to A$75.0 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of A$3.86, the analyst price target of A$4.81 is 19.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.