Expanding Margins And Operational Efficiency Signal Strong Growth Ahead For Banking Sector

Key Takeaways

• Expansion in net interest margin and strong loan growth in real estate suggest future revenue growth from increased interest income.
  
• Improved earnings and strong credit quality, coupled with operational efficiency, indicate potential for sustained earnings growth and return on equity improvement.
  
• Southern Missouri Bancorp faces risks from interest rates, loan income volatility, agricultural sector challenges, and regulatory shifts impacting profitability and loan quality.

Catalysts

Operates as the bank holding company for Southern Bank that provides banking and financial services to individuals and corporate customers in the United States.

• The expansion of net interest margin due to increasing yields on interest-earning assets and loan yield expansion, coupled with the management of high-cost CDs repricing lower, can lead to further growth in net interest income.
  
• A 39.1% quarter-over-quarter increase in noninterest income, driven by seasonal fee income and the reduction of losses from sales of securities, indicates potential for continued growth in noninterest revenue sources.
  
• Control over noninterest expense, with a slight decrease quarter-over-quarter, reflects operational efficiency that could contribute to improving net margins.
  
• Strong loan growth, particularly in nonowner-occupied commercial real estate and residential real estate loans, suggests future revenue growth from expanded interest income.
  
• Improved quarterly earnings and strong credit quality, as demonstrated by a reduction in nonperforming loans and consistent loan growth, indicate potential for sustained earnings growth and return on equity improvement.

Assumptions

• Analysts are assuming Southern Missouri Bancorp's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.1% today to 32.0% in 3 years time.
• Analysts expect earnings to reach $68.5 million (and earnings per share of $6.07) by about September 2027, up from $49.9 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 11.2x on those 2027 earnings, down from 12.6x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The higher interest rate environment impacts Southern Missouri Bancorp’s cost of deposits and net interest margin, potentially affecting the company's profitability and net interest income.
  
• A decrease in loan fee income and NSF revenues indicates potential volatility in noninterest income, which could reduce overall earnings.
  
• Increased operational and credit costs due to the challenging agricultural sector, including higher costs for inputs and potential commodity price pressures, may impact net margins.
  
• Reliance on agricultural loan performance, amidst variable weather conditions and commodity pricing challenges, poses a risk to loan quality and thus earnings.
  
• Regulatory changes or macroeconomic shifts that affect the banking sector, including interest rate changes by the Federal Reserve, could unpredictably impact both net interest income and the allowance for credit losses.

Valuation

• The analysts have a consensus price target of $58.67 for Southern Missouri 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 $213.8 million, earnings will come to $68.5 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $55.62, the analyst's price target of $58.67 is 5.2% 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.