New SBA Lending Division And Deposit Strategy Will Transform Future Operations

Key Takeaways

• Bankwell's strategy to reduce deposit costs and resolve nonperforming assets is likely to enhance net interest margins and stabilize credit costs.
  
• Expansion in SBA lending and core deposits is expected to drive significant revenue growth and increase future earnings per share.
  
• Bankwell Financial Group's challenges with loan performance and revenue diversification could hinder short-term growth and necessitate careful management of asset quality and income streams.

Catalysts

Operates as the bank holding company for Bankwell Bank that provides various banking services for individual and commercial customers.

• Bankwell's reduction in brokered deposits and growth in core deposits, particularly through Bankwell Direct, is expected to improve net interest margins by lowering deposit costs and enhancing deposit quality.
  
• The planned repricing of $1.3 billion in time deposits at lower rates is anticipated to save $4.4 million annually, likely leading to margin expansion and higher earnings per share by approximately $0.44.
  
• The initiation and growth of an SBA lending division, projected to significantly increase noninterest income to $7 million-$8 million in 2025, is expected to drive future revenue growth.
  
• Progress in resolving nonperforming assets, including sales agreements for major nonperforming loans, will likely reduce the nonperforming asset ratio by over 100 basis points, potentially stabilizing credit costs and enhancing net margins.
  
• Anticipated modest loan growth of 3% to 5% and net interest income growth to $93 million-$95 million in 2025 suggest a potential increase in overall earnings, driven by the shift towards more C&I lending and improved interest margin management.

Bankwell Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bankwell Financial Group's revenue will grow by 30.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.1% today to 39.1% in 3 years time.
• Analysts expect earnings to reach $55.2 million (and earnings per share of $7.19) by about January 2028, up from $9.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, down from 25.7x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Bankwell Financial Group Future Earnings Per Share Growth

Risks

• Bankwell Financial Group experienced a decrease in pre-provision net revenue and net interest margin, primarily due to reduced loan fees and an elevated cash position, which could negatively impact net margins and earnings if these trends continue.
  
• The company faced $3 million in net charge-offs from nonperforming loans, which, if similar situations arise, could lead to further impacts on earnings and asset quality.
  
• Despite expectations of modest loan growth in 2025, the bank’s efforts to grow its commercial and industrial (C&I) portfolio over commercial real estate (CRE) may take time to materialize, potentially constraining revenue growth in the short term.
  
• While the bank is optimistic about SBA lending, the ramp-up in fee-based income could be slower than expected, which might adversely affect anticipated noninterest income and overall earnings.
  
• The company is dealing with multi-quarter issues related to nonperforming loans and loan maturities, including a complex workout for a large office loan in a club deal, which could affect future revenue and possibly require further write-downs.

Valuation

• The analysts have a consensus price target of $40.0 for Bankwell Financial Group 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 2028, revenues will be $141.3 million, earnings will come to $55.2 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $30.63, the analyst's price target of $40.0 is 23.4% 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.