Commercial Real Estate Woes And Rate Cuts Threaten Earnings Outlook

Key Takeaways

• Declining interest rates and sensitivity may pressure revenue and earnings due to reduced net interest margins.
  
• Increased investment in risk management and tech can suppress margins, while commercial real estate struggles could lead to sustained charge-offs.
  
• Strong capital position, robust deposit growth, and focus on risk management and tech infrastructure support long-term profitability and shareholder value.

Catalysts

Operates as the holding company for First-Citizens Bank & Trust Company that provides retail and commercial banking services to individuals, businesses, and professionals.

• The anticipated decline in net interest income due to lower accretion and potentially additional rate cuts may negatively impact future revenue, especially if interest rates fall significantly by the end of the year.
  
• The company's asset sensitivity poses a risk to net interest margins in a down-rate scenario and could pressure earnings as rate cuts erode interest income.
  
• Increased spending on risk management and technology capabilities, while necessary for strategic growth, could compress net margins due to elevated personnel and professional fees costs.
  
• Persistent stress in commercial real estate loans, particularly in the general office sector, could lead to sustained net charge-offs, impacting overall earnings and setting a cautious outlook into 2025.
  
• Potential reductions in deposit balances from cash burn and limited venture investment activity could constrain revenue from the SVB commercial segment, even as the company seeks to grow its customer base.

First Citizens BancShares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Citizens BancShares's revenue will decrease by -2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.0% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $185.16) by about November 2027, down from $2.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2027 earnings, up from 12.3x today. This future PE is greater than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 8.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

First Citizens BancShares Future Earnings Per Share Growth

Risks

• The share repurchase program indicates a strong capital position and confidence in future cash flows, which could positively impact earnings per share and shareholder value.
  
• Stability and growth in the deposit base, particularly in the SVB commercial segment, suggest a competitive advantage that could sustain net interest margins and overall revenue.
  
• Investment in risk management and technology infrastructure demonstrates a focus on sustainable growth and regulatory readiness, supporting long-term profitability and efficiency.
  
• Continued growth in the pipeline for Global Fund Banking suggests potential for future revenue increases despite recent loan declines.
  
• A higher average loan balance, coupled with potential decreases in deposit costs, could mitigate pressure on net interest margin, supporting future earnings.

Valuation

• The analysts have a consensus price target of $2148.18 for First Citizens BancShares based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.8 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $2217.73, the analyst's price target of $2148.18 is 3.2% lower. 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.