Fintech And Cyber Risks Will Harm Digital Banking

Key Takeaways

• Digital-only focus and lack of physical presence limit deposit growth, cross-selling opportunities, and long-term profitability.
  
• Heavy exposure to real estate lending and rising compliance costs heighten vulnerability to economic downturns and increased competition.
  
• Strategic fintech partnerships, digital platform scaling, and tech-driven risk management are boosting profitability, market share, and diversification while positioning the company for continued growth.

Catalysts

Operates as the bank holding company for First Internet Bank of Indiana that provides various commercial, small business, consumer, and municipal banking products and services to individuals and commercial customers in the United States.

• Intensifying competition from both proliferating fintech startups and big tech entrants threatens to erode First Internet Bancorp's customer base and compress fees, putting the company's long-term revenue growth and fee income at risk.
  
• The company's niche as a digital-only bank, without a robust physical presence, could severely constrain deposit acquisition and limit its ability to cross-sell higher-margin financial products, ultimately stalling core revenue expansion and suppressing profitability.
  
• First Internet Bancorp remains highly exposed to cyclical real estate and commercial lending, making net margins and earnings increasingly vulnerable to asset quality deterioration and credit losses during economic downturns-recent quarters already saw elevated charge-offs in these segments.
  
• Persistently rising regulatory compliance costs around cybersecurity and anti-money laundering, combined with escalating cyber threat and fraud risk, will disproportionately inflate noninterest expenses relative to larger, better-capitalized competitors and further pressure net margins.
  
• The accelerating pace of technological change in digital banking and surging consumer expectations for seamless experiences raise the risk that First Internet Bancorp will fail to keep up with innovation cycles, resulting in customer attrition, declining noninterest income, and erosion of competitive relevance over time.

First Internet Bancorp Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on First Internet Bancorp compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming First Internet Bancorp's revenue will grow by 14.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.4% today to 42.6% in 3 years time.
• The bearish analysts expect earnings to reach $73.5 million (and earnings per share of $8.14) by about July 2028, up from $21.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.3x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

First Internet Bancorp Future Earnings Per Share Growth

Risks

• Accelerating digital transformation and consumer adoption of online financial services continue to expand market opportunities for digital-first banks like First Internet Bancorp, supporting long-term revenue and deposit growth as consumers migrate away from traditional branch banking.
  
• The company's embedded finance and fintech partnerships are generating strong noninterest and interest income, with fintech partnership revenue up 30 percent quarter-over-quarter and management expecting to surpass prior full-year forecasts, indicating further upside to income diversification and earnings growth.
  
• Improved operating leverage arising from scaling the digital platform and paying down high-cost deposits is resulting in higher net interest income and widening net interest margin, which management projects could further expand to between 2.35 and 2.45 percent by the fourth quarter, providing a tailwind for profitability.
  
• Continued advancements in fintech, automation, and analytics are enabling the company to optimize underwriting, enhance risk management, and improve loan performance across its portfolio, which could lower credit loss rates over time and increase return on equity.
  
• Industry-wide migration toward cloud banking and API integration, along with increasing regulatory support for fintech innovation, positions agile online banks like First Internet Bancorp to benefit from new product rollouts and capture market share from slower-to-adapt traditional banks, potentially boosting long-term competitive positioning and revenues.

Valuation

• The assumed bearish price target for First Internet Bancorp is $24.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of First Internet Bancorp's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $172.3 million, earnings will come to $73.5 million, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 8.4%.
• Given the current share price of $27.75, the bearish analyst price target of $24.0 is 15.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.