CapStar Integration And Decisive Investments Set To Propel Bank's Growth Amid Economic Challenges

Key Takeaways

• Expanded market presence and successful CapStar Bank integration enhances footprint in southeastern markets, likely boosting revenue and customer base.
  
• Solid core business expansion evident in strong deposit and loan growth, underlining efficient capital management and potential for enhanced earnings per share.
  
• Aggressive competition and economic conditions may negatively impact net interest margins, revenue growth, and profitability, and pose execution risks in acquisitions.

Catalysts

Operates as the bank holding company for Old National Bank that provides various financial services to individual and commercial customers in the United States.

• Expanded market presence and successful integration with CapStar Bank, enhancing Old National's footprint in vibrant southeastern markets, likely to boost revenue and customer base growth.
  
• Strong deposit growth of 2.4% annualized and significant loan growth of 5.9% annualized, excluding CapStar transactions, suggesting solid core business expansion that could positively impact net interest income.
  
• Maintenance of a low total deposit cost at 216 basis points and emphasis on growing tangible common book value per share, which grew 10% from a year ago, reflecting efficient capital management and potentially enhancing earnings per share.
  
• Investment in wealth management, treasury management, and capital markets businesses aimed at accelerating revenue streams and improving net interest income through diversified financial services.
  
• Continued focus on disciplined loan growth and solid credit quality amidst economic uncertainties, positioning the bank well for sustainable growth and potentially minimizing future losses, thereby preserving earnings quality.

Assumptions

• Analysts are assuming Old National Bancorp's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.2% today to 35.0% in 3 years time.
• Analysts expect earnings to reach $772.0 million (and earnings per share of $2.31) by about September 2027, up from $505.7 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 14.8x on those 2027 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 9.02% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Risks

• Aggressive competition in deposit rates may continue to exert upward pressure on the bank's total cost of deposits, potentially compressing net interest margins (NIM) further if deposit costs rise more than projected.
  
• The reliance on the high 7% range for new loan production rates to drive net interest income growth could be at risk if overall interest rates decrease or competition increases, leading to lower-than-expected yields on new loans, impacting revenue growth and profitability.
  
• Execution risks associated with integrating and realizing expected synergies from the CapStar Bank acquisition, including the management of approximately $400 million in planned deposit runoff from CapStar, could impact liquidity and the cost structure, affecting earnings.
  
• A projection of modest increases in net interest income relies on specific interest rate cuts and a declining rate deposit beta; deviations from these assumptions due to economic fluctuations could negatively impact net interest income and earnings.
  
• The forecasted increase in the second half charge-offs, albeit modestly higher than the first half, indicates potential credit quality concerns as economic conditions evolve, which could lead to higher provision expenses and affect net income.

Valuation

• The analysts have a consensus price target of $22.94 for Old National 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 2027, revenues will be $2.2 billion, earnings will come to $772.0 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.5%.
• Given the current share price of $18.46, the analyst's price target of $22.94 is 19.5% 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.