New Leadership And Decisive Cost Management Set Stage For Sustained Growth In Net Margins

Key Takeaways

• Anticipated net interest margin increases, combined with proactive credit management, boost revenue growth and reduce risk in the loan portfolio.
  
• New leadership and strategic cost management aim to optimize earnings growth and enhance overall profitability.
  
• Rising costs and weak demand, combined with portfolio risks, threaten future earnings and profitability amid potential interest rate challenges.

Catalysts

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

• The company anticipates sequential net interest margin (NIM) increases, driven by rising loan yields and cost reductions in interest-bearing liabilities, which should enhance revenue and earnings growth.
  
• Borrowings will see repricing in the first quarter of 2025, presenting an opportunity to capture favorable interest rate conditions anticipated from potential future rate cuts, positively impacting net interest income.
  
• The proactive management of credit quality challenges, particularly in the metro-office loan segment, reduces potential future charge-offs and enhances net margins by mitigating risk.
  
• The transition to new leadership with a track record of successful management at a large bank introduces potential strategic adjustments to optimize earnings growth.
  
• Strategic cost management and expense discipline, coupled with margin expansion efforts, are expected to improve operating efficiency, directly benefiting net margins and overall profitability.

First Interstate BancSystem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Interstate BancSystem's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.7% today to 25.6% in 3 years time.
• Analysts expect earnings to reach $296.8 million (and earnings per share of $2.86) by about November 2027, up from $235.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $263.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, down from 14.8x 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 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.52%, as per the Simply Wall St company report.

First Interstate BancSystem Future Earnings Per Share Growth

Risks

• The bank observed charge-off noise related to its metro-office portfolio, implying potential risks in its commercial real estate sector, which could adversely impact future earnings and net margins.
  
• Interest-bearing deposits' costs increased more than anticipated due to customers aggressively pursuing higher rates, which could continue to pressure the net interest margin and thus affect future profitability.
  
• Loan balances decreased significantly by $207.9 million in the third quarter, reflecting potentially weak loan demand or higher payoffs, which could negatively impact future revenues.
  
• There is uncertainty around significant nonperforming loans in the portfolio, like the agricultural credit and a commercial loan, indicating potential future charge-offs, which can negatively affect earnings.
  
• The sensitivity to projected rate cuts and repricing of $1.7 billion of borrowings in early 2025 poses interest rate risks, potentially impacting future net interest income if rates do not move favorably.

Valuation

• The analysts have a consensus price target of $32.0 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 $36.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $296.8 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of $33.42, the analyst's price target of $32.0 is 4.4% 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.