Asian American Demand And Digital Banking Will Strengthen Performance

Key Takeaways

• Growth in core Asian-American markets and urban regions is fueling loan demand, bolstering revenue and supporting reliable future expansion.
  
• Enhanced digital capabilities and disciplined credit practices are improving efficiency, asset quality, and noninterest income, strengthening long-term profitability and shareholder value.
  
• Heavy exposure to commercial real estate, asset quality concerns, digital competition, geographic concentration, and regulatory pressures threaten growth, profitability, and long-term stability.

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.

• Sustained growth in the bank's core Asian-American customer base, with ongoing wealth creation and business formation in key markets like California and New York, provides a reliable pipeline for new commercial and real estate lending, supporting future revenue and loan growth.
  
• The continued economic expansion and commercial activity in urban regions where Cathay General operates is driving demand for both commercial and CRE loans, which is reflected in the upward revision of loan growth guidance and is likely to positively impact top-line revenue and net interest income.
  
• The bank's ongoing investments and progress in digital capabilities are increasing operational efficiency and enabling additional cross-sell opportunities (evidenced by higher foreign exchange and derivative fee income), supporting margin expansion and noninterest income growth.
  
• Strong credit discipline, with low nonaccrual and classified loan ratios despite headline charge-off events, underpins stable asset quality, translating to more predictable earnings and reduced long-term credit-cost volatility.
  
• Disciplined capital allocation, including active share repurchases and steady dividend practices, is expected to drive higher EPS and total shareholder returns over time, enhancing the value proposition as the stock remains undervalued relative to underlying fundamentals.

Cathay General Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay General Bancorp's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.8% today to 40.8% in 3 years time.
• Analysts expect earnings to reach $393.8 million (and earnings per share of $5.5) by about August 2028, up from $294.7 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 9.5x on those 2028 earnings, down from 10.6x today. This future PE is lower than the current PE for the US Banks industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 3.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Cathay General Bancorp Future Earnings Per Share Growth

Risks

• Heavy concentration in commercial real estate (CRE) loans, particularly in office and retail property segments (with office property loans alone comprising 14% of total CRE loans and 7% of total loans), exposes Cathay General Bancorp to persistent sector headwinds like declining CRE values, tenant bankruptcies, and higher delinquencies, which could lead to increased credit losses, higher provisioning, and pressure on earnings.
  
• Rising levels of nonperforming and classified loans-such as the increase of nonaccrual loans and a significant rise in classified loans driven by downgrades and borrower cash flow problems-signal potential asset quality deterioration in the loan book, which may negatively impact future revenue stability and net margins.
  
• Ongoing digital disruption in the banking sector and the shift to fintech solutions require substantial ongoing technology investments; if Cathay General Bancorp falls behind larger peers in digital banking capabilities, it risks losing market share and incurring higher costs, compressing net interest and fee margins over time.
  
• Significant geographic focus in California and a customer base concentrated in the Chinese-American and Asian-American communities could amplify vulnerability to localized economic shocks, regulatory shifts, demographic changes, or immigration policy restrictions, potentially limiting loan and deposit growth and affecting long-term revenue streams.
  
• Heightened regulatory scrutiny-such as evolving capital requirements (noted by slight decreases in risk-based capital ratios) and increased compliance costs associated with anti-money laundering and liquidity management-may further raise expense ratios and reduce profitability in a competitive, consolidating regional banking environment.

Valuation

• The analysts have a consensus price target of $50.6 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 $55.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $964.1 million, earnings will come to $393.8 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of $45.04, the analyst price target of $50.6 is 11.0% 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.