Acquiring Penns Woods Bancorp And Shifting To C&I Lending Will Elevate The Firm Into The Top 100 Banks

Key Takeaways

• The acquisition and strategic shift towards C&I lending are expected to enhance market position and improve net interest margins.
  
• Focus on deposit gathering and pricing discipline could bolster earnings growth and maintain low borrowing costs.
  
• Integration risks from acquiring Penns Woods Bancorp and market shifts towards commercial loans pose challenges to earnings stability and asset quality.

Catalysts

Operates as the bank holding company for Northwest Bank, a state-chartered savings bank that provides personal and business banking solutions.

• The acquisition of Penns Woods Bancorp is expected to enhance Northwest's market position and potentially drive revenue growth by expanding its franchise in Pennsylvania and increasing its scale to become one of the top 100 largest banks in the nation.
  
• Northwest's strategic shift towards commercial and industrial lending, with significant growth in the C&I loan portfolio, can improve net interest margins due to a higher focus on variable-rate loans and optimizing its loan mix.
  
• Sustained improvements in net interest margin and efficiency ratio, aided by strategic pricing discipline on deposits and loan origination, are likely to bolster earnings growth.
  
• The company's focus on deposit gathering with a stable and strong funding base at near best-in-class cost of funds can help maintain low borrowing costs and support margin expansion.
  
• Responsible and profitable growth in the commercial space with a focus on C&I lending, coupled with expected modest loan and deposit growth, positions the company for incremental net interest income improvement.

Northwest Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northwest Bancshares's revenue will grow by 19.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.1% today to 30.4% in 3 years time.
• Analysts expect earnings to reach $257.1 million (and earnings per share of $1.68) by about January 2028, up from $100.3 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 10.0x on those 2028 earnings, down from 16.6x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 6.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Northwest Bancshares Future Earnings Per Share Growth

Risks

• The recent acquisition of Penns Woods Bancorp, despite positioning Northwest as a larger bank, poses integration risks and could result in unexpected costs or strategic misalignments, affecting net margins and future earnings.
  
• With a slowdown in residential mortgage growth and a portfolio shift towards commercial loans, changes in market conditions or economic downturns could negatively impact revenue stability and interest income.
  
• Commercial real estate (CRE) exposure, although controlled, could present challenges due to fluctuations in market conditions, potentially affecting asset quality and future earnings.
  
• Noninterest expense has been increasing, which, if not managed properly, could impact the company's efficiency ratio and net margins.
  
• The company’s current and expected reliance on interest rate environments could expose it to risks if there are unfavorable rate changes, affecting net interest margin and overall earnings stability.

Valuation

• The analysts have a consensus price target of $14.12 for Northwest Bancshares 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 $846.9 million, earnings will come to $257.1 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $13.04, the analyst's price target of $14.12 is 7.7% 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.