New Credit Enhancement Product Will Provide Low-Risk Income In 2025

Key Takeaways

• FinWise Bancorp's new strategic initiatives aim to diversify revenue streams, enhancing medium to long-term growth and providing stable, recurring income.
  
• Credit enhancement and BIN Sponsorship initiatives are expected to lower risk, improve margins, and drive revenue growth through strategic partnerships and lending programs.
  
• Heightened nonperforming loans and strategic changes may strain short-term margins despite growth efforts through fintech partnerships and new program expansions.

Catalysts

Operates as the bank holding company for FinWise Bank that provides various banking products and services to individual and corporate customers in Utah.

• FinWise Bancorp has announced new strategic programs, including lending, payments, and credit card initiatives, which are expected to diversify and expand revenue streams by providing more sticky and recurring revenue. This can positively impact revenue in the medium to long term.
  
• The company has introduced a credit enhancement product that is anticipated to be a meaningful contributor to revenue in 2025, offering an immediate growth opportunity by providing low-risk income as it gains traction. This is likely to enhance net margins due to the lower credit risk associated with the product.
  
• The momentum in FinWise's BIN Sponsorship and payments initiatives is expected to gradually build through 2025, providing opportunities for revenue growth and the potential to improve earnings as these programs scale.
  
• Strategic partnerships and new lending programs announced in late 2024 are anticipated to scale over the next few quarters, leading to incremental loan originations and growth in interest income, impacting future revenue positively.
  
• The strategic decision to reduce the credit risk in the portfolio through credit enhancement is expected to maintain or improve net interest margins, as these low-risk offerings continue to develop and mature over time.

FinWise Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FinWise Bancorp's revenue will grow by 29.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.8% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $31.5 million (and earnings per share of $2.29) by about April 2028, up from $13.1 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 10.9x on those 2028 earnings, down from 14.6x today. This future PE is greater than the current PE for the US Banks industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 3.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

FinWise Bancorp Future Earnings Per Share Growth

Risks

• The increase in nonperforming loans and higher rate environment impacts could negatively affect the credit quality, potentially leading to increased provisions for credit losses, which may impact net margins.
  
• The company anticipates potential migration of approximately $12 million in nonperforming assets in the upcoming quarter, driven by rate pressures, which could affect overall earnings if not managed well.
  
• With significant reliance on new strategic partner programs and fintech collaborations for growth, any delays in launching these initiatives or failure to achieve expected traction could impact projected revenues.
  
• The determination to move away from higher-yielding brokered callable CDs might positively affect short-term costs, but net interest margin compression over time due to strategic credit risk reduction could affect future interest income.
  
• Although the company is expanding new programs such as BIN Sponsorship and payments, their gradual and initially slower growth may not offset immediate financial pressures, possibly affecting short-term revenue streams.

Valuation

• The analysts have a consensus price target of $20.5 for FinWise Bancorp 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 2028, revenues will be $150.2 million, earnings will come to $31.5 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of $14.53, the analyst price target of $20.5 is 29.1% 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.