Population Growth And Digital Trends Will Drive Cross-Border Banking Opportunities

Key Takeaways

• Unique demographic focus and cross-border expertise support above-average loan, deposit growth, and premium noninterest income opportunities over the long term.
  
• Operational efficiency improvements and digital initiatives, alongside regulatory flexibility, are set to drive enhanced profitability and sustained margin expansion.
  
• High exposure to commercial real estate, slow digital adoption, and rising compliance costs pose significant risks to revenue growth and profitability in a competitive market.

Catalysts

Operates as the holding company for Cathay Bank that offers various commercial banking products and services to individuals, professionals, and small to medium-sized businesses in the United States.

• Analyst consensus points to stable or modestly higher loan yields from Cathay's large portfolio of fixed-rate and hybrid loans as rates decline, but with a historically high percentage of such loans and a proven ability to maintain loan yields, Cathay could see outsized net interest margin expansion if rates fall faster than expected, materially boosting net interest income.
  
• While analyst consensus anticipates modest loan growth in a stabilizing mortgage market, Cathay's unique demographic exposure and relationship-driven model could drive a much more significant rebound, with accelerating loan originations and cross-sell opportunities supporting higher long-term revenue growth.
  
• Cathay General Bancorp is uniquely positioned to capture substantial new business and deposit growth from the ongoing population growth and wealth creation within Asian American communities, with this core customer base contributing to above-peer deposit and lending growth and supporting both revenue and earnings expansion.
  
• Growing U.S.-Asia trade flows and Cathay's established cross-border expertise should unlock premium growth in trade finance, international corporate lending, and related fee-based services, leading to outsized growth in high-margin noninterest income for years to come.
  
• Continued investments in digital banking and operational efficiency, combined with emerging regulatory flexibility, are likely to result in sustained improvements in cost-to-income ratios and technology-enabled fee revenue streams, materially enhancing net margins and long-term bottom-line growth.

Cathay General Bancorp Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cathay General Bancorp compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cathay General Bancorp's revenue will grow by 10.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 41.1% today to 40.7% in 3 years time.
• The bullish analysts expect earnings to reach $380.7 million (and earnings per share of $5.58) by about July 2028, up from $284.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 11.9x 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 decline by 2.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Cathay General Bancorp Future Earnings Per Share Growth

Risks

• Heavy concentration in commercial real estate lending, particularly in California, exposes Cathay General Bancorp to potential losses if a CRE market correction or regional economic downturn occurs, which could result in elevated credit losses and reduced earnings.
  
• The bank's slower adaptation to digital and mobile banking trends in an environment of accelerating fintech innovation may lead to higher customer attrition, especially among younger demographics, ultimately limiting future deposit and loan growth, and putting revenue at risk.
  
• Persistent uncertainties in the economy, including the impact of tariffs and a slowing demand among C&I customers, have already led to a downward revision in the loan growth outlook to a range of just 1% to 4%, reflecting sluggish top line growth and pressure on future revenues.
  
• Rising regulatory and compliance costs, as evidenced by higher FDIC assessments and the growing importance of ESG standards, could put additional pressure on operational efficiency, and contribute to margin compression over time.
  
• A reliance on aggressive deposit promotions and concentration in core markets increases deposit cost sensitivity and exposes the bank to risks from intensified competition and potential deposit flight, which may compress net interest margins and negatively impact profitability.

Valuation

• The assumed bullish price target for Cathay General Bancorp is $60.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cathay General Bancorp's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $936.1 million, earnings will come to $380.7 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $48.1, the bullish analyst price target of $60.0 is 19.8% 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.