Rising Fintech Pressure And Credit Risks Will Erode Margins

Key Takeaways

• Rising competition from fintech and regulatory pressures threaten growth, profitability, and efficiency, increasing the challenge of sustaining long-term earnings.
  
• High exposure to commercial real estate and concentration in niche markets raise credit and concentration risks, limiting revenue and exposing the company to downturns.
  
• Strong deposit growth, digital investments, prudent capital management, and geographic expansion position Amalgamated Financial for stable earnings and long-term resilience.

Catalysts

Operates as the bank holding company for Amalgamated Bank that provides commercial and retail banking, investment management, and trust and custody services in the United States.

• Despite ongoing investments in digital transformation, Amalgamated Financial faces escalating competition from fintech and nonbank financial providers, which threatens core deposit and fee growth as customer expectations for innovation continue to rise-likely resulting in muted long-term revenue expansion and erosion of net margin.
  
• The company's heavy exposure to commercial real estate lending and pockets of stress in its green energy portfolio set the stage for elevated credit losses and increased provisions, with the risk of further credit deterioration if economic or asset-specific downturns accelerate, directly curtailing net income and lowering return on equity.
  
• Persistently high compliance costs and mounting regulatory scrutiny, particularly impacting ESG-focused and politically-oriented banks, could erode profitability as Amalgamated faces stricter capital and disclosure requirements-with rising operating expenses putting pressure on efficiency ratios and weighing on long-term earnings growth.
  
• Limited geographic diversification and an outsized focus on niche segments such as union and mission-driven client bases increase concentration risk, leaving the company exposed to regional downturns or shifts in sector-specific demand, which could constrain deposit and loan growth prospects, ultimately restricting overall revenue.
  
• As the industry consolidates and larger banks achieve superior economies of scale and technology spending power, institutions like Amalgamated Financial could struggle to maintain competitive pricing, invest in necessary cybersecurity upgrades, and retain client relationships-all of which could compress margins and lead to declining earnings over time.

Amalgamated Financial Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Amalgamated Financial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Amalgamated Financial's revenue will grow by 12.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 33.9% today to 34.8% in 3 years time.
• The bearish analysts expect earnings to reach $151.2 million (and earnings per share of $4.97) by about August 2028, up from $103.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, down from 8.1x today. This future PE is lower than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 1.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Amalgamated Financial Future Earnings Per Share Growth

Risks

• Amalgamated Financial has demonstrated consistent asset growth and strong deposit gathering, including robust increases from political and not-for-profit clients, which suggests that revenue and net interest income may stay resilient or even grow.
  
• Strategic investments in digital transformation and data-driven banking infrastructure could drive efficiency gains and enhance customer engagement, potentially leading to higher revenue per share and improving long-term net margins.
  
• The expansion of the lending team and the bank's geographic footprint, particularly into large markets like California with seasoned bankers, positions Amalgamated for continued loan growth, supporting future earnings and balance sheet expansion.
  
• The company maintains high capital ratios and a conservative balance sheet, with tangible book value per share up 18% year-over-year and a top-tier common equity tier 1 capital ratio, both of which underpin stability and could buffer against adverse earnings surprises.
  
• A disciplined approach to share repurchases and dividend growth, supported by strong core profitability and prudent provisioning, demonstrates management's commitment to returning capital to shareholders and sustaining net earnings growth over time.

Valuation

• The assumed bearish price target for Amalgamated Financial is $27.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Amalgamated Financial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $434.3 million, earnings will come to $151.2 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $27.89, the bearish analyst price target of $27.0 is 3.3% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.