Fintech Expansion Will Enhance Future Opportunities

Key Takeaways

• Bancorp's fintech growth and expansion efforts are set to enhance noninterest income and yield higher revenue streams, boosting overall profitability.
  
• Strategic stock buybacks and interest rate declines could improve earnings per share and stabilize net margins, strengthening financial management.
  
• Rising substandard multifamily loans and increased credit risk could impact earnings, alongside pressures from reduced buybacks, rate exposure, and growing noninterest expenses.

Catalysts

Operates as the bank holding company for The Bancorp Bank, National Association that provides banking products and services in the United States.

• The Bancorp's growth in its Fintech Solutions Group, with impressive GDV and fee growth, sets the stage for increasing noninterest income, indicating potential revenue expansion in 2025.
  
• The anticipated decrease in interest rates could alleviate the burden of substandard multifamily loan assets, potentially stabilizing and improving net margins by reducing credit risk or loss provisions.
  
• Planned strategic stock buybacks in 2025, contingent on financial conditions, could enhance earnings per share (EPS) and signify strengthened capital management.
  
• The company's strategy to enhance business segment profitability visibility, specifically highlighting its payments ecosystem, aims to optimize cost allocations, which may positively impact operational efficiency and net margins.
  
• Expansion efforts in the credit sponsorship and fintech lending spaces are expected to boost higher yield revenue streams, improving overall earnings and contributing significantly to profitability.

Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bancorp's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 43.6% today to 51.0% in 3 years time.
• Analysts expect earnings to reach $319.8 million (and earnings per share of $7.5) by about December 2027, up from $205.7 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 9.3x on those 2027 earnings, down from 12.9x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 3.83% 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.

Bancorp Future Earnings Per Share Growth

Risks

• Continued elevation in substandard multifamily loan assets poses a credit risk, which could impact earnings if losses are incurred despite optimistic expectations.
  
• A reduction in planned stock buybacks due to potential repayment of outstanding senior secured debt may signal caution or capital preservation, impacting earnings per share and shareholder returns.
  
• Exposure to rate changes through large investments in fixed-rate U.S. government-sponsored agency securities could lead to margin compression if interest rates decrease more rapidly than anticipated, affecting net interest margin.
  
• An increase in provision for credit losses suggests rising risk within the loan portfolio, particularly with REBL loans recently classified as special mention or substandard, which could impact future earnings.
  
• Rising noninterest expenses, including increased salaries and benefits, may pressure net margins and bottom-line profitability if not offset by corresponding revenue growth.

Valuation

• The analysts have a consensus price target of $59.67 for Bancorp 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 $66.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $626.9 million, earnings will come to $319.8 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of $55.49, the analyst's price target of $59.67 is 7.0% 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.