Resolving Nonperforming Loans And Tariff Risks Will Secure Stability

Key Takeaways

• The bank’s careful approach amid trade uncertainties and control on deposit costs could stabilize loan growth and improve net interest margins.
  
• Resolving nonperforming loans and a strategic share buyback program could enhance earnings per share and boost future earnings.
  
• Economic uncertainties, nonperforming loans, and tariff impacts challenge Preferred Bank's revenue stability and loan portfolio expansion, with potential pressure on future earnings.

Catalysts

Provides various banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, professionals, and high net worth individuals.

• Preferred Bank is closely monitoring its trade finance segment amidst uncertainty from international tariffs, positioning itself to mitigate potential risks, which could stabilize or enhance future loan growth and revenue.
  
• The bank is poised for growth but is adopting a cautious approach due to uncertainties, indicating a potential for improving future loan portfolio performance and revenues if economic conditions become favorable.
  
• Management is confident in resolving nonperforming loans with significant collateral backing, potentially reducing provisions for loan losses and enhancing future earnings.
  
• Preferred Bank’s focus on controlling deposit costs will help maintain or potentially improve net interest margins, supporting stronger future net income.
  
• The bank has an ongoing share buyback program with $23 million still available, which could increase earnings per share if stock is repurchased at undervalued prices.

Preferred Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Preferred Bank's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 47.8% today to 39.7% in 3 years time.
• Analysts expect earnings to reach $124.7 million (and earnings per share of $9.92) by about May 2028, down from $127.2 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 10.8x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Preferred Bank Future Earnings Per Share Growth

Risks

• The company's net income for the quarter was negatively impacted by nonperforming loans and a real estate charge-off, which could continue to affect future earnings if these issues persist or worsen.
  
• There is a significant level of nonperforming loans totaling $71 million, predominantly tied to two large credits, suggesting potential credit risk and future instability in revenue if the resolution process encounters obstacles or delays.
  
• The bank is grappling with the uncertainty of a global tariff war, which could dampen loan demand and impact trade finance, potentially leading to decreased revenue from this segment.
  
• Although there was a small increase in deposits, the negative loan growth indicates challenges in expanding the loan portfolio, which could affect net margins if not addressed.
  
• Economic uncertainties related to tariffs and supply chain disruptions could impact the bank's real estate and C&I customers, potentially leading to further decreases in revenue and pressure on net margins.

Valuation

• The analysts have a consensus price target of $93.25 for Preferred Bank 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 $314.0 million, earnings will come to $124.7 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $81.0, the analyst price target of $93.25 is 13.1% 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.