Shrinking Profit Margins And Regulatory Costs Paint A Bleak Outlook For Growth

Key Takeaways

• Anticipated rate cuts and elevated loan payoffs could compress interest margins and impact revenue, posing challenges to future growth expectations.
  
• Approaching regulatory thresholds may increase operational costs, pressuring margins if growth isn’t managed to counteract these expenses.
  
• Strong capital levels and improved asset quality position S&T Bancorp for potential growth in revenue and earnings through strategic expansion and enhanced net interest income.

Catalysts

Operates as the bank holding company for S&T Bank that engages in the provision of retail and commercial banking products and services.

• The anticipated reduction in Fed rates and subsequent rate cuts throughout 2024 and 2025 are expected to exert downward pressure on the net interest margin, with a predicted compression of 10 to 12 basis points initially. This could negatively impact net interest income if deposit costs decrease slower than expected.
  
• Elevated commercial loan payoffs, driven by demand in the permanent market and existing credit risk appetite, suggest a potential slowdown in commercial loan growth, impacting overall revenue growth expectations.
  
• With the expected increase in certainty about interest rates, some potential customers may expedite refinancing activities, which could result in lower future loan balances and reduce interest income projections.
  
• Fluctuations in noninterest income due to previously recognized securities losses and declining noninterest income could indicate volatility in earnings, affecting future earnings stability if not offset by operational efficiency or other income streams.
  
• The looming threshold of the $10 billion asset mark raises concerns about additional costs related to regulatory oversight, including the Durbin Amendment, which could pressure net margins by increasing operational costs if growth is not adequately managed to offset these expenses.

S&T Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S&T Bancorp's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.0% today to 28.0% in 3 years time.
• Analysts expect earnings to reach $116.7 million (and earnings per share of $3.02) by about November 2027, down from $135.2 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 15.8x on those 2027 earnings, up from 12.1x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.36% 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.

S&T Bancorp Future Earnings Per Share Growth

Risks

• S&T Bancorp's strong capital levels and improved asset quality position the company well for continued growth, potentially leading to solid revenue and earnings growth.
  
• The significant growth in the deposit franchise, with over $100 million in customer deposits in the quarter, supports a robust net interest margin and could enhance future net interest income.
  
• An increase in the loan pipeline, particularly in the commercial sectors, suggests anticipated loan growth in Q4 and 2025, which may drive revenue growth.
  
• Improving asset quality, with declines in nonperforming assets and criticized loans, indicates a stable and potentially enhanced net margin due to lower provisioning needs.
  
• S&T Bancorp's strategic focus on both organic and inorganic growth opportunities, supported by their strong capital base, may lead to increased revenue and earnings over time.

Valuation

• The analysts have a consensus price target of $40.75 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 2027, revenues will be $416.7 million, earnings will come to $116.7 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $42.68, the analyst's price target of $40.75 is 4.7% lower. 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.