Strong Loan Growth And Critical Initiatives Propel Earnings With Promising Future Prospects

Key Takeaways

• Strong growth in net interest income and strategic initiatives like LIHTC lending boost future earnings and margin expansion.
  
• Wealth management expansion and deposit growth strategies enhance earnings stability and improve net interest margins.
  
• QCR Holdings' over-reliance on LIHTC lending and upcoming regulatory challenges may pose risks to revenue, profitability, and margins amidst changing market conditions.

Catalysts

A multi-bank holding company, provides commercial and consumer banking, and trust and asset management services.

• QCR Holdings is experiencing significant growth in net interest income and margin expansion, driven by strong loan and investment balance growth, which is likely to impact future revenue positively.
  
• The continued expansion of the low-income housing tax credit (LIHTC) lending program is a strategic growth initiative, providing higher margins and increased capital markets revenue, thereby enhancing future earnings.
  
• The bank's securitization strategy for LIHTC loans improves liquidity, boosts the net interest margin, and strengthens balance sheet flexibility, contributing to sustained earnings growth.
  
• A robust pipeline in wealth management with new client acquisition and regional personnel additions could lead to increased assets under management, impacting future noninterest income and net margins.
  
• Focused deposit growth strategy and liquidity measures reduce reliance on high-cost funding, which, along with improved operating efficiencies, is likely to enhance net margins and earnings stability.

QCR Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming QCR Holdings's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.1% today to 29.0% in 3 years time.
• Analysts expect earnings to reach $133.9 million (and earnings per share of $7.78) by about November 2027, up from $116.5 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 13.7x on those 2027 earnings, up from 12.9x 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 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

QCR Holdings Future Earnings Per Share Growth

Risks

• QCR Holdings' dependency on the LIHTC lending program and subsequent securitizations for revenue growth suggests over-reliance on a single asset class, which could expose them to heightened risk if market demand for these loans diminishes, impacting capital markets revenue and net interest income.
  
• The decision to discontinue the equipment finance business, while intended to improve profitability, resulted in a $2.4 million restructuring cost, reflecting current operational inefficiencies which could affect short-term earnings.
  
• A noticeable portion of QCR Holdings' growth strategy involves securitizing loans, including a significant $166 million planned for future securitizations, indicating dependence on external market conditions to ensure successful execution and favorable economics, impacting net margins if conditions shift.
  
• The focus on deposit growth to support loan growth could be challenged by higher deposit competition or changing market conditions, potentially affecting net interest income and margin expansion if deposits become more costly to acquire or retain.
  
• The upcoming regulatory implications of crossing the $10 billion asset threshold, with associated increases in operational expenses and regulatory compliance costs, could strain profit margins and net earnings if not adequately offset by revenue growth or cost efficiencies.

Valuation

• The analysts have a consensus price target of $90.2 for QCR Holdings 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 $461.6 million, earnings will come to $133.9 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $89.29, the analyst's price target of $90.2 is 1.0% 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.