Mission-Driven Banking Strategy Boosts Deposits And Pioneers Climate Finance Growth

Key Takeaways

• The mission-based banking model and focus on purpose-driven customers in specific sectors is enhancing deposit growth and net interest income.
  
• Strategic involvement in the climate finance sector and effective liquidity management through a reciprocal network are poised to drive future revenue growth and improve net interest margins.
  
• Amalgamated Financial faces reduced liquidity, increased credit risks, obscured financial health, potential loan portfolio vulnerabilities, and lower net interest income in an uncertain economic environment.

Catalysts

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

• The focus on being a mission-based banking model is resonating with purpose-driven customers and impact investors, which should attract more deposits in the political, union, and nonprofit customer segments, enhancing deposit growth and stability, and thus impacting net interest income positively.
  
• Amalgamated Financial's involvement in conferences and partnerships globally, especially in the climate finance sector, positions the company at the forefront of a rapidly growing industry, likely contributing to future revenue growth through new impact loan commitments and sustainable lending activities.
  
• The management of off-balance sheet deposits within a reciprocal network, avoiding the addition of significant borrowing to the funding mix, demonstrates effective liquidity management that can lead to improved net interest margins.
  
• Significant deposit growth, particularly in nonpolitical deposits which outperformed internal plans, provides a solid foundation for funding and investing in growth opportunities without relying on costly external financing, positively affecting net interest income.
  
• The conservative approach in forecasting, excluding assumptions about future Greenhouse Gas Reduction Fund (GGRF) lending, suggests potential upside in loan growth and revenue if political developments become favorable, with the bank well-positioned to capitalize on climate finance needs.

Assumptions

• Analysts are assuming Amalgamated Financial's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.9% today to 31.5% in 3 years time.
• Analysts expect earnings to reach $120.0 million (and earnings per share of $3.94) by about September 2027, up from $99.0 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 11.1x on those 2027 earnings, up from 9.6x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The planned outflow of political deposits during the third quarter as campaigns increase their advertising spend could result in a significant reduction of deposit levels, thereby impacting the company's liquidity and interest income.
  
• The bank’s significant exposure to commercial real estate and multifamily loans amidst an uncertain economic environment could lead to increased credit risks and potentially higher loan losses, affecting net interest margins and profitability.
  
• The reliance on non-GAAP measures to evaluate performance might obscure the real financial health and risks facing Amalgamated Financial, potentially impacting investor perception and the company’s stock price.
  
• The impact of accelerated amortization on commercial and industrial loans put back to the government, lowering net interest margin, suggests potential vulnerabilities in loan portfolio quality that could affect earnings.
  
• The expectation of reduced net interest income due to potential interest rate decreases, beyond what the forward curve currently suggests, could adversely affect the bank’s net interest margin and overall financial performance.

Valuation

• The analysts have a consensus price target of $36.17 for Amalgamated Financial 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 2027, revenues will be $380.9 million, earnings will come to $120.0 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $31.17, the analyst's price target of $36.17 is 13.8% 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.