Interest Rate Shifts And Decisive Pivot Promise Growth In The Banking Sector

Key Takeaways

• Improving net interest margins and growth in noninterest income are expected to enhance overall revenue and earnings.
  
• Diversified loan portfolios and deposit growth are projected to strengthen the funding base and expand revenue.
  
• High nonperforming loans and transitioning to higher-cost deposits could negatively impact Brookline Bancorp's earnings and profitability amidst challenging interest rate conditions.

Catalysts

Operates as a bank holding company for the Brookline Bank that provide commercial, business, and retail banking services to corporate, municipal, and retail customers in the United States.

• Expected normalization of interest rates by the Federal Reserve is anticipated to improve Brookline Bancorp's net interest margins through 2025, which could positively impact earnings.
  
• Anticipated 4% to 5% growth in customer deposits is projected, which is expected to support Brookline Bancorp’s funding base and enhance revenue growth.
  
• The planned runoff of the specialty vehicle portfolio and the reduction in related operating expenses by $800,000 a quarter are expected to improve net margins.
  
• Projected growth of 5% to 10% in noninterest income in 2025, which should contribute positively to overall revenue performance.
  
• Increased focus on institutional type loans in new markets could diversify loan portfolios and potentially enhance revenue and earnings growth.

Brookline Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Brookline Bancorp's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 29.8% in 3 years time.
• Analysts expect earnings to reach $135.1 million (and earnings per share of $1.51) by about November 2027, up from $74.1 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 10.6x on those 2027 earnings, down from 15.3x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Brookline Bancorp Future Earnings Per Share Growth

Risks

• Brookline Bancorp has a significant portion of nonperforming loans, especially in the Eastern Funding portfolio financing grocery stores and specialty vehicles, which could negatively impact net margins and earnings due to credit loss provisions.
  
• As specialty vehicle loans are in runoff mode with related charge-offs, if loss rates remain high, this could continue to negatively affect earnings and asset quality.
  
• Despite projected growth in deposit rates and customer deposits, the migration to higher-cost time deposits could persist, affecting net interest margins and overall profitability.
  
• Clarendon Private, the asset management division, is still not profitable, impacting noninterest income and potentially requiring continued investment before it contributes positively to net income.
  
• The potential future impact of changing interest rates by the Federal Reserve on the yield curve could affect Brookline Bancorp's net interest margin and, subsequently, its earnings forecast.

Valuation

• The analysts have a consensus price target of $13.0 for Brookline Bancorp 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 $15.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $452.5 million, earnings will come to $135.1 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $12.71, the analyst's price target of $13.0 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus 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.