Federal Rate Shifts And Loan Turmoil Threaten To Erode Profitability

Key Takeaways

• Expected increased net charge-offs and credit quality challenges in small ticket leasing may reduce profitability and compress net margins.
  
• Lower net interest margin and high refinancing in commercial real estate could hinder revenue and future earnings growth.
  
• Peoples Bancorp shows financial improvement, stable credit quality, strong deposit growth, strategic adjustments in leasing, and benefits from positive economic conditions.

Catalysts

Operates as the holding company for Peoples Bank that provides commercial and consumer banking products and services.

• Peoples Bancorp is adjusting its small ticket leasing division due to expected increased net charge-offs, impacting credit quality and potentially reducing profitability. This could compress net margins if higher credit risks are not offset by returns.
  
• The bank is expecting lower net interest margin in the future due to anticipated rate reductions by the Federal Reserve, combined with increased loan paydowns, which could depress net interest income growth.
  
• Peoples Bancorp's commercial real estate segment faces headwinds from high paydowns and refinancing, which could slow down loan growth, impacting revenue growth projections.
  
• Reductions in net interest income and margin due to past Federal Reserve rate hikes, which were not offset by corresponding deposit repricing, may continue to affect future earnings.
  
• Rising charge-offs in both small ticket leasing and consumer indirect loans imply persistent credit quality challenges, which may lead to increased provisions for credit losses and impact earnings.

Peoples Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Peoples Bancorp's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.7% today to 23.4% in 3 years time.
• Analysts expect earnings to reach $112.6 million (and earnings per share of $3.14) by about November 2027, down from $123.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $125.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.98% 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.

Peoples Bancorp Future Earnings Per Share Growth

Risks

• Peoples Bancorp's recent performance has shown consistent improvement in key financial metrics, such as EPS growth, increased net interest income and margin, and a decrease in noninterest expenses, all potentially supporting revenue growth and net margins.
  
• The company's credit quality is relatively stable, with overall delinquency rates remaining low and criticized loans declining, suggesting a more stable earnings environment and manageable risks.
  
• There is strong growth in deposits, with particular strength in client deposits, which can bolster the bank's funding base and potentially lead to more consistent revenue generation through lending activities.
  
• Peoples Bancorp has implemented strategic adjustments in its small ticket leasing business, focusing on risk management and since historically this segment has been profitable, it may continue to provide substantial contributions to overall earnings.
  
• Positive economic indicators in key geographic markets, such as rental rate and job growth, could bolster the company's loan portfolio performance and enhance profitability, contributing to stronger earnings.

Valuation

• The analysts have a consensus price target of $36.42 for Peoples Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $481.3 million, earnings will come to $112.6 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 5.9%.
• Given the current share price of $34.86, the analyst's price target of $36.42 is 4.3% 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.