Navigating Rising Rates And Deposit Dynamics To Fuel Growth And Margin Expansion

Key Takeaways

• Anticipation of improved net interest margin and earnings due to favorable asset repricing and competitive macro backdrop suggests potential revenue growth.
  
• Strategic deposit growth and disciplined expense management point to a more stable funding source and potential for margin improvement and earnings stability.
  
• Navigating a competitive deposit market, maintaining profitability over loan growth, and managing securities cautiously in fluctuating interest rates may challenge profitability and liquidity.

Catalysts

Operates as the holding company for Simmons Bank that provides banking and other financial products and services to individuals and businesses.

• The anticipation of favorable asset repricing due to stability on the deposit side and a competitive macro backdrop suggests potential improvement in net interest margin (NIM) and earnings.
  
• Positive momentum in loan yields, with the bank experiencing a trend of increasing portfolio yields in a rising rate environment, indicates potential for continued revenue growth through higher interest income.
  
• Strategic deposit growth, particularly in noninterest-bearing accounts, coupled with successful management of deposit costs (only a 4 basis points increase), hints at a more stable and cost-effective funding source, positively impacting net margins.
  
• A disciplined approach to managing the securities portfolio with an eye towards capital and earnings balance, alluding to potential benefits in terms of capital efficiency and earnings stability.
  
• Ongoing focus on disciplined expense management and investment in systems and talent to improve operational efficiency, indicating potential for margin improvement and long-term growth in earnings.

Assumptions

• Analysts are assuming Simmons First National's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.7% today to 22.6% in 3 years time.
• Analysts expect earnings to reach $233.4 million (and earnings per share of $1.89) by about September 2027, up from $150.8 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 13.8x on those 2027 earnings, down from 18.0x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

Risks

• A competitive deposit market and irrational pricing by competitors could elevate funding costs, negatively affecting net interest margin and overall profitability.
  
• The focus on maintaining profitability over loan growth in a challenging lending environment may lead to lower revenue growth from the lending business, impacting net income.
  
• Incremental approach to managing the securities portfolio against the backdrop of fluctuating interest rates could result in missed opportunities for yield improvement, affecting net interest income.
  
• Aggressive cost management and the pursuit of efficiency gains may not fully offset inflationary pressures and wage inflation, potentially leading to higher-than-expected operating expenses and squeezing net margins.
  
• Dependence on core customer account growth for deposit stability faces headwinds from economic conditions and customer behavior, which could challenge liquidity management and impact interest expense if alternative, higher-cost funding sources are required.

Valuation

• The analysts have a consensus price target of $21.9 for Simmons First National 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 $1.0 billion, earnings will come to $233.4 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of $21.56, the analyst's price target of $21.9 is 1.6% 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.