Strategic Liquidity And Credit Standards Poised To Propel Earnings Growth In Banking Industry

Key Takeaways

• Strategic liquidity building and credit standards position the bank to capitalize on future economic growth, stabilizing net margins and earnings.
  
• Customer dissatisfaction with competitor mergers boosts deposit growth, enhancing liquidity and potential loan growth, thus improving earnings opportunities.
  
• Declining loan portfolios and earnings, coupled with credit risks and limited growth strategies, highlight challenges in revenue growth and sustainability for South Plains Financial.

Catalysts

Operates as a bank holding company for City Bank that provides commercial and consumer financial services to small and medium-sized businesses and individuals.

• The expectation of the Federal Reserve continuing to reduce interest rates could stimulate economic growth, lending to an acceleration in loan growth, positively impacting revenues.
  
• Stabilization in the indirect auto loan portfolio and a robust new business pipeline in the loan segment might remove existing headwinds, potentially leading to improved loan growth and earnings.
  
• The significant deposit growth driven by customer dissatisfaction with competitor mergers provides a strong liquidity position, supporting potential loan growth, thus enhancing earnings opportunities.
  
• Strategic focus on building liquidity and maintaining high credit standards prepares the bank to capitalize on future economic growth, which could improve net margins and earnings stability.
  
• Active measures to manage deposit costs and opportunities from expected declines in community bank mergers and acquisitions could create synergies, contributing to an increase in net margins and overall earnings.

South Plains Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming South Plains Financial's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.7% today to 23.9% in 3 years time.
• Analysts expect earnings to reach $55.6 million (and earnings per share of $3.19) by about November 2027, up from $43.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2027 earnings, up from 14.3x 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 2.0% 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.

South Plains Financial Future Earnings Per Share Growth

Risks

• The decline in loan portfolios, particularly the indirect auto portfolio and in major metropolitan markets, indicates potential challenges in maintaining loan growth, which can impact revenue growth.
  
• The third-quarter earnings were negatively impacted by a decrease in the fair value adjustment of mortgage servicing rights and a continued managed decline of the indirect auto portfolio, highlighting potential risks to net margins and earnings stability.
  
• Noninterest income saw declines primarily due to decreased mortgage banking revenues and a decrease in income from investments, revealing vulnerabilities in diversifying the revenue stream and sustaining earnings.
  
• The presence of a $20 million nonaccrual multifamily loan and an increase in nonperforming loans introduces credit risk that could affect net margins if not effectively managed.
  
• A cautious approach towards mergers and acquisitions, due to high hurdles for potential deals, may limit growth opportunities and strategic expansions, affecting long-term revenue potential.

Valuation

• The analysts have a consensus price target of $40.25 for South Plains Financial 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 $46.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $232.6 million, earnings will come to $55.6 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 5.9%.
• Given the current share price of $37.89, the analyst's price target of $40.25 is 5.9% 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.