Emphasizing Relationship Banking Will Attract New Customers And Improve Loan Pricing

Key Takeaways

• Strategic focus on relationship banking and organic growth aims to enhance net margins and return on equity by reducing dilutive practices.
  
• Repricing assets and reducing borrowing are expected to strengthen net interest income growth, while capital deployment in high-growth markets ensures revenue stability.
  
• Increased credit risk and market challenges could pressure revenues, earnings, and asset quality, with concerns around real estate exposure and interest rate risk management.

Catalysts

Operates as the bank holding company for First Interstate Bank that provides range of banking products and services in the United States.

• Discontinuation of indirect lending business to focus on relationship banking and organic growth. Expected to improve net margins and return on equity as it reduces dilutive business practices.
  
• Emphasis on full relationship banking to drive deposit growth, enhance loan pricing, and increase new customer acquisition, positively impacting revenue and earnings.
  
• Utilization of amortization cash flow from the discontinued indirect lending to grow the customer base, potentially boosting revenue.
  
• Repricing of assets and reduction in borrowing levels expected to support net interest income growth by 5% to 7% in 2025, enhancing net margins.
  
• Modest organic growth forecast in loan and deposit volumes, with strategic capital deployment to high-growth markets, likely contributing to revenue stability and potential growth.

First Interstate BancSystem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Interstate BancSystem's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.3% today to 26.9% in 3 years time.
• Analysts expect earnings to reach $316.8 million (and earnings per share of $3.08) by about March 2028, up from $226.0 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 14.2x on those 2028 earnings, up from 12.9x today. This future PE is greater than the current PE for the US Banks industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

First Interstate BancSystem Future Earnings Per Share Growth

Risks

• The company is experiencing increased credit risk, with notable increases in criticized and classified loans, particularly in commercial real estate and C&I, which could impact future earnings through higher provisions and potential charge-offs.
  
• The discontinuation of indirect lending could lead to a decline in loan balances, comprising 4% of the loan portfolio, thereby potentially stagnating or reducing revenue growth in the near term.
  
• Market challenges in the mortgage business and assumptions of limited revenue growth from fee-based activities like payment volumes could result in stagnant or declining noninterest income, pressuring overall revenue.
  
• Interest rate risk is present as First Interstate anticipates modestly declining earning assets and assumes down beta on deposits lags, which might impact net interest margins and net interest income if not managed carefully.
  
• Exposure to senior living and multifamily properties facing leasing and profitability challenges, which could lead to continued credit quality issues and affect asset quality metrics, pressuring earnings and necessitating more significant provisioning.

Valuation

• The analysts have a consensus price target of $35.5 for First Interstate BancSystem 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 $42.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $316.8 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $27.81, the analyst price target of $35.5 is 21.7% 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.