Expanded Banking Teams And Stable Net Interest Margins Are Expected, But Shrinking Profit Margins May Pressure Future Earnings

Key Takeaways

• Accelerated loan growth and expanded banking recruitment are expected to positively impact revenue and enhance future growth.
  
• Stability in net interest margins and improved asset quality bolster net margins and earnings, supporting anticipated revenue growth.
  
• Slight contractions in net interest metrics and increased noninterest expenses may pressure revenue, reducing growth potential amid competitive deposit markets and economic uncertainty.

Catalysts

Operates as the bank holding company for S&T Bank that engages in the provision of retail and commercial banking products and services to consumer, commercial and small business in Pennsylvania and Ohio.

• Loan growth is projected to accelerate significantly in 2025 due to an expanded pipeline and increased business and commercial banking recruitment, which is expected to impact revenue positively.
  
• The stability of net interest margins, maintained at about 3.70%, supported by repricing strategies and bond restructurings, is expected to bolster net interest income moving forward.
  
• Improvements in asset quality, with declining nonperforming assets and charge-offs, along with a stable reserve position, are likely to support net margins and earnings.
  
• Anticipated mid-single-digit growth from commercial and consumer loans through 2025, driven by expanded banking teams and increased customer confidence, is likely to enhance revenue growth.
  
• Continued investments in production capacity and customer experiences, alongside existing high levels of capital, position the company for potentially transformative growth opportunities, impacting earnings favorably.

S&T Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S&T Bancorp's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.2% today to 28.7% in 3 years time.
• Analysts expect earnings to reach $126.2 million (and earnings per share of $3.29) by about March 2028, down from $131.3 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 15.4x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.07% 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.

S&T Bancorp Future Earnings Per Share Growth

Risks

• Slight contraction in net interest income and net interest margin observed in Q4 raises concerns about pressures on revenue growth if economic conditions do not improve.
  
• The decline in earning asset yield and reliance on deposit repricing strategies for margin stability could impact earnings if external rate cuts occur or competitive pressures increase in the deposit market.
  
• Increased payoffs in Q4, while contributing to improved asset quality, could potentially reduce net loan growth and thus impact future revenues.
  
• Fluctuations in noninterest income, alongside anticipated increases in noninterest expenses by approximately 3% in 2025, could pressure net margins if income growth does not keep pace.
  
• While capital levels are strong, a slight decrease in the TCE ratio due to higher rates may signal potential risks in regulatory capital levels impacting growth capabilities.

Valuation

• The analysts have a consensus price target of $42.75 for S&T 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 2028, revenues will be $439.4 million, earnings will come to $126.2 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $37.86, the analyst price target of $42.75 is 11.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.