Stock Buyback Program Will Improve Shareholder Value

Key Takeaways

• Continued stock buyback could enhance earnings per share and strengthen shareholder value.
  
• Decreased noninterest expenses and improved risk management may positively impact margins and stabilize earnings.
  
• Declining noninterest income, increased nonaccrual loans, and higher expenses, coupled with decreased deposits, pose risks to Cathay General Bancorp's earnings and profitability.

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 expects loan growth in 2025 to be between 3% and 4%, which could enhance future revenue.
  
• The company's anticipation to continue the $125 million stock buyback program, with plans to repurchase around $30 million in stock in Q1 2025, could boost earnings per share (EPS) and shareholder value.
  
• Expected improvements in net interest margin (NIM) for 2025, projected between 3.10% and 3.20%, may lead to increased net interest income, impacting earnings positively.
  
• Decreasing noninterest expenses, influenced by planned control measures and lower tax credit investments, may improve net margins going forward.
  
• Enhanced risk management practices and the addition of qualified personnel like a new Chief Risk Officer are expected to mitigate future credit risk, potentially stabilizing and boosting future earnings.

Cathay General Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay General Bancorp's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.3% today to 37.8% in 3 years time.
• Analysts expect earnings to reach $334.3 million (and earnings per share of $4.93) by about January 2028, up from $286.0 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 12.5x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 1.49% 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 decline in noninterest income, with a $4.9 million decrease primarily due to a significant change in mark-to-market unrealized gains/losses, poses a risk to earnings stability and growth.
  
• Cathay General Bancorp experienced an increase in nonaccrual loans, notably a $16 million commercial real estate loan reclassified due to the borrower's bankruptcy filing, which may impact net margins and earnings through potential future credit losses.
  
• The reported net charge-offs increased notably from Q3 to Q4, with significant losses related to a syndicated commercial loan in the recycling business, indicating potential weaknesses in credit quality that could affect future earnings.
  
• A notable decrease in total deposits, especially a $449 million decrease in brokered deposits, could impact their funding cost and net interest margin if they are forced to secure higher-cost deposits or other funding.
  
• The company's expectation of increased noninterest expenses, due to staffing increases and higher expected bonus accruals, could pressure net margins and overall profitability if not matched by revenue growth.

Valuation

• The analysts have a consensus price target of $52.4 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 $57.0, and the most bearish reporting a price target of just $43.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $883.7 million, earnings will come to $334.3 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $47.3, the analyst's price target of $52.4 is 9.7% 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.