Anticipating Interest Rate Cuts To Propel Profitability And Tech Upgrades To Boost Engagement

Key Takeaways

• Bridgewater's strategic investments in technology aim to enhance client engagement and operational efficiencies, potentially boosting revenue growth and margin expansion.
  
• The company's strong asset quality and experienced lending teams position it favorably for market opportunities, contributing to sustained loan growth and improved net interest income.
  
• Elevated loan payoffs and rising funding costs amidst a competitive environment could suppress loan growth and erode profitability, despite strong asset quality.

Catalysts

Operates as the bank holding company for Bridgewater Bank that provides banking products and services to commercial real estate investors, entrepreneurs, business clients, and individuals in the United States.

• The anticipation of future interest rate cuts and a normalizing yield curve positions Bridgewater to benefit from these changes, potentially leading to margin expansion and profitability stabilization which could impact net interest margins and overall revenue growth.
  
• Strong asset quality with no net charge-offs and very low levels of non-performing assets indicate a lower risk profile, which could contribute to lower provision expenses and higher net earnings.
  
• The tangible book value per share growth over 30 consecutive quarters showcases the company's ability to consistently grow shareholder value, potentially impacting investor perception and stock valuation.
  
• Investments in technology, such as the new CRM platform and online banking solution for retail and small business clients, are expected to enhance client engagement and operational efficiencies, leading to potential revenue growth and margin expansion.
  
• Bridgewater's experienced lending teams and strong underwriting standards have allowed it to maintain high-quality loan portfolios, particularly in CRE and multifamily loans, which positions it to potentially capitalize on market opportunities and sustain loan growth, impacting net interest income and earnings positively.

Assumptions

• Analysts are assuming Bridgewater Bancshares's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.6% today to 30.6% in 3 years time.
• Analysts expect earnings to reach $47.2 million (and earnings per share of $1.61) by about October 2027, up from $30.4 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 12.5x on those 2027 earnings, down from 13.7x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 2.34% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Risks

• The elevated levels of loan payoffs observed, which have shown a significant increase already in the current quarter, might suppress loan growth, impacting net interest income and overall revenue growth.
  
• A continued pressure on deposit costs, despite a slowdown in deposit pricing pressures, could erode the net interest margin, affecting profitability.
  
• Higher funding costs due to a competitive environment and overall deposit mix shifts, if not mitigated, could further pressure net interest margins.
  
• Project delays by borrowers due to high-interest rates and challenging equity markets could lead to reduced loan origination, impacting loan growth and associated fee income.
  
• While asset quality remains strong, the acknowledgment of potential credit normalization over time suggests an increase in non-performing assets and provisions for loan losses, which could impact earnings and capital ratios.

Valuation

• The analysts have a consensus price target of $16.83 for Bridgewater Bancshares 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 $154.1 million, earnings will come to $47.2 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 6.4%.
• Given the current share price of $15.19, the analyst's price target of $16.83 is 9.8% 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.