US Expansion And Digital Initiatives Set To Boost Future Prospects

Key Takeaways

• The U.S. acquisition and Receivable Purchase Program are expected to drive loan growth, higher net margins, and improved earnings.
  
• Favorable regulatory conditions may allow VersaBank's DRT Cyber to leverage digital currency opportunities for potential revenue increases.
  
• Concerns about higher default rates, execution risks, and integration challenges could negatively impact revenue consistency, earnings, and operational margins amidst regulatory and market pressures.

Catalysts

Provides various banking products and services in Canada and the United States.

• The recent acquisition of a U.S. bank and the ramp-up of the U.S. Receivable Purchase Program (RPP) is expected to drive significant loan growth and higher net interest margins, positively impacting revenue and earnings.
  
• There's potential for improved net interest margins in the Canadian segment as interest rates trend downward and the yield curve flattens, which would enhance profitability.
  
• The shift to CMHC insured loans in the real estate portfolio is expected to deliver higher yields with zero risk weighting, improving net margins and return on equity.
  
• Syndicating RPP loans with U.S. banking partners provides an opportunity for increased revenue through both lending spreads and additional fees, enhancing overall earnings.
  
• The favorable regulatory environment in the U.S. for digital currencies may lead to opportunities for VersaBank's DRT Cyber to monetize its digital deposit receipt technology, potentially boosting future revenue streams.

VersaBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VersaBank's revenue will grow by 32.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.6% today to 55.2% in 3 years time.
• Analysts expect earnings to reach CA$145.0 million (and earnings per share of CA$4.53) by about February 2028, up from CA$38.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, down from 16.7x today. This future PE is lower than the current PE for the CA Banks industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

VersaBank Future Earnings Per Share Growth

Risks

• Concerns about higher default rates among borrowers and increased loan put backs to partners during tough economic times could impact revenue consistency and credit quality.
  
• A significant portion of revenue growth hinges on the successful ramp-up of the U.S. Receivable Purchase Program; execution risks associated with onboarding new partners and navigating regulatory barriers could impact future earnings.
  
• The decrease in net interest margin due to an historically inverted yield curve and changes in real estate portfolio might negatively affect net margins and profitability.
  
• Integration risks associated with the recent U.S. bank acquisition, including one-time costs and the challenge of realizing expected efficiencies, could impact earnings and operational margins.
  
• The delay in realizing contributions from DRT Cyber’s new products and cybersecurity services adds uncertainty to noninterest income growth and revenue diversification efforts.

Valuation

• The analysts have a consensus price target of CA$28.42 for VersaBank 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 CA$262.7 million, earnings will come to CA$145.0 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$19.89, the analyst's price target of CA$28.42 is 30.0% 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.