Fixed-rate Loans And Buybacks Will Secure Future Stability

Key Takeaways

• Focus on fixed-rate and hybrid loans could improve loan yields and net interest margin amidst declining market rates.
  
• Strong liquidity, promotional activities, and potential loan growth boost revenue and improve net interest income, enhancing financial stability.
  
• Trade tensions and declining loan growth pose risks to Cathay General Bancorp's revenue, margins, and investor confidence amidst economic uncertainties.

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.

• Cathay General Bancorp's focus on maintaining a high percentage of fixed-rate and hybrid loans (62% of total loans) could sustain or improve their loan yields as market interest rates decline, positively impacting net interest margin.
  
• While loan growth guidance has been revised to a broader range of 1% to 4% due to uncertainties, potential stabilization in the residential mortgage market may lead to better-than-expected loan growth, potentially boosting revenue.
  
• The successful completion of a $125 million stock repurchase program and plans for regulatory approval of a new buyback indicate a commitment to returning capital to shareholders and could enhance earnings per share (EPS) if continued.
  
• Increases in core deposits driven by promotional activities and seasonal factors, coupled with strong liquidity and capital positions, could position the bank for improved net interest income as they reduce reliance on higher-cost funding sources.
  
• Improved non-interest expense management, as consulting expenses are expected to decline and excess bonus accruals were realized, may lead to better control over operating costs, positively affecting net margins.

Cathay General Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay General Bancorp's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.1% today to 37.9% in 3 years time.
• Analysts expect earnings to reach $383.6 million (and earnings per share of $5.65) by about April 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 analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 3.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Cathay General Bancorp Future Earnings Per Share Growth

Risks

• The ongoing tariffs between the U.S. and China present a risk to Cathay General Bancorp's financials, as they could adversely impact around 1.4% of the bank's total loans. This situation could lead to reduced loan revenue and strain on net margins if borrowers face difficulties.
  
• The recent decrease in net income by 13.3% along with a decrease in diluted earnings per share suggests potential challenges in maintaining earnings growth, which could affect investor confidence and future profitability.
  
• Cathay General Bancorp reported a decrease in total gross loans during Q1 2025, primarily driven by decreases in commercial and residential loans. Continued reductions in these loan segments could negatively impact future revenue streams.
  
• An increase in the provision for credit loss due to concerns over a commercial client indicates potential credit quality issues, which could result in higher nonperforming assets and negatively impact net margins.
  
• The bank's uncertainty in loan growth guidance reflects broader economic uncertainties and specific concerns about customers’ growth prospects in light of tariffs and trade issues, which could lead to reduced income and constrained expansion in the future.

Valuation

• The analysts have a consensus price target of $48.8 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 2028, revenues will be $1.0 billion, earnings will come to $383.6 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $41.35, the analyst price target of $48.8 is 15.3% 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.