Digital Transformation And Critical Growth Propel The Bank Towards Resilient Revenue Expansion

Key Takeaways

• Loan portfolio expansion and digital efforts are set to sustain revenue growth and stabilize interest margins despite volatile rates.
  
• Strategic capital allocation, robust risk management, and digital transformation enhance asset quality and shareholder value.
  
• Foreign exchange volatility, judicial reform concerns, and fintech competition threaten revenue, net margins, and overall earnings stability amid uncertain economic policies and conditions.

Catalysts

Through its subsidiaries, engages in the provision of banking and financial products and services in Mexico and internationally.

• Grupo Financiero Banorte's ongoing loan portfolio expansion, particularly in the corporate and consumer segments, driven by strategic investments and new product launches, is expected to sustain revenue growth over the next few years.
  
• The bank's strategic balance sheet optimization, including positioning towards a higher proportion of fixed-rate loans, is set to stabilize and potentially enhance net interest margins even as interest rates fall.
  
• Robust risk management and internal credit risk models have strengthened asset quality, enabling the bank to maintain a low cost of risk, which could enhance net margins over time.
  
• Banorte's focus on digital transformation and hyperpersonalization is expected to increase customer engagement and retention, supporting stable revenue growth from fees and digital banking services.
  
• The bank's capital allocation strategy, including potential share buybacks and dividends, is tailored to optimize shareholder value, positively impacting earnings per share and overall financial performance.

Grupo Financiero Banorte. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Financiero Banorte. de's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.9% today to 34.2% in 3 years time.
• Analysts expect earnings to reach MX$62.9 billion (and earnings per share of MX$23.16) by about November 2027, up from MX$55.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MX$44.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2027 earnings, up from 7.7x today. This future PE is lower than the current PE for the MX Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.1%, as per the Simply Wall St company report.

Grupo Financiero Banorte. de Future Earnings Per Share Growth

Risks

• The panelists discuss a deceleration in GDP growth expectations, with projections of 1.3% for 2024 and 1% for 2025, which could negatively impact revenue potential for the company.
  
• Persistent volatility in the Mexican currency, partly due to the upcoming U.S. elections, may affect the company's earnings through foreign exchange fluctuations.
  
• There is concern about potential judicial reforms in Mexico that could complicate loan recoveries and impact asset quality and provisions, thereby affecting net margins.
  
• A rise in competition, especially from digital banks and fintech companies offering higher interest rates on deposits, could pressure Banorte's funding costs and affect net interest margins.
  
• Economic policies from the incoming administration and the uncertain developments of the U.S. economy could lead to variations in loan demand and asset quality, impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of MX$181.67 for Grupo Financiero Banorte. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$230.0, and the most bearish reporting a price target of just MX$155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MX$183.8 billion, earnings will come to MX$62.9 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 15.1%.
  
• Given the current share price of MX$149.16, the analyst's price target of MX$181.67 is 17.9% 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.