Federal Reserve Cuts Will Erode US Bank Margins

Key Takeaways

• Anticipated declines in interest income and lending activity could hinder revenue growth and limit future loan portfolio expansion, affecting overall earnings.
  
• Challenges in managing deposit costs and noninterest income variability could impact profitability, with unexpected expenses potentially compressing net margins.
  
• Strong financial performance driven by increased net income, robust credit quality, disciplined expense management, strong capital position, and a planned stock repurchase boosting shareholder value.

Catalysts

Operates as a bank holding company for Great Southern Bank that provides a range of financial services in the United States.

• There is an expectation that the net interest margin may decrease slightly due to the anticipated cessation of $2 million per quarter in interest income from a terminated interest rate swap after the third quarter of 2025. This could impact the company's earnings negatively.
  
• The commentary during the call suggested that lending activity has slowed, with increased competition among banks for fewer loans available in the market. This could hinder revenue growth and limit future loan portfolio expansion, thus affecting overall earnings growth.
  
• The focus on maintaining a stable deposit base and the ability to manage funding costs could be challenged by potential future Federal Reserve rate cuts. This may limit the company's ability to protect net interest margins and, consequently, affect future profitability.
  
• Noninterest income faced a decrease and showed variability due to factors like reduced overdraft fees and net gains on mortgage loan sales. Continued fluctuations or declines in noninterest income could adversely impact future revenue and earnings.
  
• Expense management is a priority, but any unexpected increases in operating expenses, such as continued investments in infrastructure, personnel, and technology, might compress net margins and limit earnings growth in the future.

Great Southern Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Great Southern Bancorp's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.9% today to 23.9% in 3 years time.
• Analysts expect earnings to reach $55.2 million (and earnings per share of $5.15) by about May 2028, down from $65.6 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 9.9x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Great Southern Bancorp Future Earnings Per Share Growth

Risks

• Great Southern Bancorp's net income increased, driven by higher net interest income from stronger loan and investment yields and lower funding costs, indicating potential revenue stability and growth.
  
• A robust credit quality with minimal nonperforming assets and negligible net charge-offs, together with a negative provision for credit losses, highlights the strong credit portfolio and could contribute positively to net margins.
  
• Disciplined expense management and investments in key areas such as technology and personnel while maintaining a stable efficiency ratio suggest potential for improved net margins through operational efficiency.
  
• Strong capital position and ample liquidity, with access to significant funding lines, support resilience and strategic opportunities, potentially enhancing earnings through stability and growth initiatives.
  
• A planned stock repurchase authorization, if executed amid tepid growth, could enhance shareholder value and EPS, benefiting the earnings outlook.

Valuation

• The analysts have a consensus price target of $59.0 for Great Southern 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 $231.1 million, earnings will come to $55.2 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 6.4%.
• Given the current share price of $55.9, the analyst price target of $59.0 is 5.3% 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.