Stock Buybacks And Strong Reserves Will Support Future Stability

Key Takeaways

• Strategic stock buybacks and rising deposits may enhance shareholder value and bolster revenue generation capabilities.
  
• Strong loan portfolio and improved net interest margins support financial stability amid changing market rates.
  
• Rising nonaccrual loans and elevated credit loss provisions suggest potential credit quality issues, posing risks to earnings, revenue growth, and financial 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.

• The company is executing a substantial stock buyback program, with plans to repurchase around $35 million in stock per quarter through Q1 2025, which could potentially enhance earnings per share and increase shareholder value.
  
• The fixed-rate and hybrid loans, which account for a significant portion of the loan portfolio, are expected to maintain loan yields as market rates decline, potentially supporting net interest margins.
  
• The improvement in net interest margin is anticipated to be in the range of 3.05% to 3.10% for 2024, with expectations that the margin has bottomed out and will begin to recover, driven by the Fed's rate cycle.
  
• Total deposits increased, with a notable rise in core deposits due to seasonal factors and marketing activities; this growth in deposits could bolster revenue generation capabilities.
  
• The company appears to be strengthening its reserves, as evidenced by the increase in the provision for credit losses, which could help manage any potential future loan losses, supporting profitability and earnings stability.

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 $328.1 million (and earnings per share of $4.78) by about December 2027, up from $288.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $363.1 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 12.7x on those 2027 earnings, up from 12.4x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 1.2% 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 company experienced a significant increase in nonaccrual loans, indicating potential credit quality issues, which could negatively impact future earnings.
  
• Slow loan growth is anticipated for 2024, with expected growth between -1% and 0%, reflecting potential challenges in expanding their loan book and impacting future revenue growth.
  
• An increase in the provision for credit losses from $6.6 million to $14.5 million in Q3 indicates growing concerns about future loan defaults, which could impact net margins.
  
• Fixed rate loans comprise a large portion of their loan portfolio, which may not be as favorable when market rates change, potentially affecting future net interest income margins.
  
• A significant portion of total deposits are uninsured (42.1%), which poses liquidity risks and may impact financial stability if rapid withdrawals occur.

Valuation

• The analysts have a consensus price target of $51.4 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 $60.0, 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 $826.5 million, earnings will come to $328.1 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of $50.02, the analyst's price target of $51.4 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.