Nuevo And Mexico City Expansion Will Create Future Opportunities

Key Takeaways

• Strategic expansion and technology upgrades in key regions are enhancing market positioning, driving revenue growth through improved customer experience and acquisition.
  
• Operational efficiency and diversified revenue streams from nonfinancial sectors strengthen earnings resilience and support sustainable profitability and stable net margins.
  
• Operational expenses and integration challenges could impact profitability, with asset quality concerns and reliance on certain loan segments posing additional risks.

Catalysts

Provides various banking products and services.

• Continued strategic branch expansion, particularly in key regions such as Nuevo, Jalisco, and Mexico City, and the addition of 200 new ATMs and technology upgrades to improve customer experience and security. This is likely to drive revenue growth through enhanced market positioning and customer acquisition.
  
• Strong growth trajectory in core deposit growth by 13%, fueled by a 40% rise in term deposits and 10% increase in checking accounts, reflecting customer confidence, which should help stabilize net interest income and overall financial stability.
  
• Significant growth in nonfinancial income sectors, such as insurance, foreign exchange fees, and payment-related fees (up 45%), strengthens and diversifies revenue streams beyond traditional banking, positively impacting earnings resilience.
  
• Increased engagement through the upgraded digital platform and infrastructure positioning Hey Banco to capitalize on cross-selling strategies. This should improve the portfolio mix and enhance revenue and earning potential through expanded customer reach and product offerings.
  
• Operational efficiency improvements and expected stabilization of administrative expenses, including technology-related costs, are likely to keep net margins robust, supporting sustainable profitability and long-term value to shareholders as revenue outpaces expense growth.

Regional. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Regional. de's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.3% today to 35.1% in 3 years time.
• Analysts expect earnings to reach MX$7.6 billion (and earnings per share of MX$24.29) by about May 2028, up from MX$6.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$8.4 billion in earnings, and the most bearish expecting MX$6.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from 7.1x today. This future PE is greater than the current PE for the MX Banks industry at 7.6x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.12%, as per the Simply Wall St company report.

Regional. de Future Earnings Per Share Growth

Risks

• The slight decrease in net interest margin could continue if interest rates fall further, impacting revenue and net interest income.
  
• Operational expenses are projected to remain high due to branch expansions, higher personnel costs, and technology investments, potentially affecting net margins and earnings.
  
• Asset quality concerns, particularly with the wholesale segment and isolated but large cases moving to Stage 3, pose risks that could increase provisions and impact overall profitability.
  
• A reliance on growth in specific segments such as auto loans and SME loans, which might be affected by macroeconomic slowdowns, could limit revenue growth if these areas do not perform as expected.
  
• The potential integration challenges and strategic differences between Hey Banco and Banregio may result in inefficiencies, impacting revenue growth and market strategy execution.

Valuation

• The analysts have a consensus price target of MX$161.985 for Regional. 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$196.8, and the most bearish reporting a price target of just MX$130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$21.7 billion, earnings will come to MX$7.6 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 15.1%.
  
• Given the current share price of MX$140.86, the analyst price target of MX$161.98 is 13.0% 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.