Loan Growth Struggles And Rising Costs Challenge Bank's Revenue Yet Interest Margin Gains Offer Hope

Key Takeaways

• Weak loan growth and rising nonaccrual loans may pressure future revenue and net margins, increasing provisioning and potential credit losses.
  
• Expected net interest margin improvements could be limited by current loan structures and potential funding cost increases from time deposit repricing.
  
• Strong capital ratios, improving net interest margins, increased noninterest income, and strategic stock repurchases and deposit management support growth, stability, and shareholder value.

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.

• Loan growth is expected to be weak, with projections for 2024 indicating a growth rate between -1% and 0%, signaling potential pressure on future revenue growth.
  
• Rising nonaccrual loans, including a significant $38 million relationship, could lead to increased provisioning and credit losses, impacting net margins negatively.
  
• The provision for credit losses has already increased by $7.9 million in Q3, which, if it continues, could further compress net margins and affect future earnings.
  
• Although the company expects net interest margin improvements as the Fed begins a rate-cutting cycle, current fixed-rate loan structures could limit loan repricing benefits, affecting net interest income.
  
• Potential fluctuations in time deposit costs, with significant repricing ahead, may not decline as expected, potentially increasing funding costs and compressing net margins further.

Cathay General Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay General Bancorp's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.8% today to 39.7% in 3 years time.
• Analysts expect earnings to reach $327.8 million (and earnings per share of $4.77) by about November 2027, up from $288.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $364.6 million in earnings, and the most bearish expecting $264 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2027 earnings, down from 13.1x 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 decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Cathay General Bancorp Future Earnings Per Share Growth

Risks

• The bank's strong capital ratios, including a Tier 1 leverage capital ratio of 10.82% and a total risk-based capital ratio of 14.88%, provide a solid foundation for growth and stability, potentially supporting future earnings.
  
• Net interest margin improvement expectations, projected to range between 3.05% and 3.10% for 2024, suggest a recovery from prior lows, positively impacting net interest income and overall earnings.
  
• An increase in noninterest income for Q3 2024, driven by a $5.7 million increase in mark-to-market gains on equity securities, indicates potential for diversified revenue streams and an ability to enhance overall revenue.
  
• Continued stock repurchase plans, with $35 million anticipated for Q4 and Q1 2025, demonstrate strong capital returns to shareholders, which can positively influence earnings per share and shareholder value.
  
• Successful management of deposit repricing, with a decrease in time deposit costs and strategic pricing of new CDs, could lower funding costs and improve net interest margins, thereby supporting profitability.

Valuation

• The analysts have a consensus price target of $46.83 for Cathay General 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 $52.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $825.7 million, earnings will come to $327.8 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $52.84, the analyst's price target of $46.83 is 12.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.