Quality Deposits And Investment Banking Will Fuel A Bright Future

Key Takeaways

• Strategic client focus and high-quality deposits are expected to boost treasury product fees, enhancing revenue and net interest margins.
  
• A delayed investment banking pipeline and capital management efforts, including share buybacks, could drive future revenue growth and EPS improvement.
  
• Macroeconomic uncertainties and credit risks threaten revenue growth, net margins, and earnings, while competition and rate volatility could impact loan growth and interest income.

Catalysts

Operates as the bank holding company for Texas Capital Bank, is a full-service financial services firm that delivers customized solutions to businesses, entrepreneurs, and individual customers.

• The bank's strategic client selection and focus on serving high-quality, less rate-sensitive deposits with value-added services should lead to growth in treasury product fees, positively impacting revenue and net interest margins.
  
• A significant pipeline of investment banking deals has been delayed rather than canceled, indicating potential future revenue growth as these transactions eventually close, contributing to both revenue and fee income increases.
  
• The enhancement of credit structures in the mortgage finance portfolio is expected to optimize risk-weighted assets, improving capital efficiency, which could favor earnings growth and improve return on equity.
  
• Continued disciplined capital management with share buybacks, driven by excess capital, suggests anticipated earnings per share (EPS) improvement in the future.
  
• A strong balance sheet with a focus on broad client acquisition and service positions the bank for resilient revenue growth across various market cycles, supporting overall earnings momentum and potential uplift in ROAA (Return On Average Assets).

Texas Capital Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Texas Capital Bancshares's revenue will grow by 21.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 39.7% in 3 years time.
• Analysts expect earnings to reach $637.7 million (and earnings per share of $14.05) by about April 2028, up from $81.2 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 6.3x on those 2028 earnings, down from 37.3x today. This future PE is lower than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 1.61% 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.

Texas Capital Bancshares Future Earnings Per Share Growth

Risks

• Market uncertainty, including anticipated effects of trade policies and tariffs, could lead to reduced client confidence, impacting hiring, capital investment, and M&A activities, potentially affecting future revenue growth.
  
• The company noted a general slowdown in people's ability to transact due to macroeconomic uncertainty, which could affect future investment banking fees and, consequently, fee-based revenue growth.
  
• The increase in special mention loans, along with ongoing macroeconomic and portfolio-specific credit risks, could result in heightened provision expenses, which might impact net margins and earnings.
  
• Rising competition and the rate-sensitive nature of some of the company's liabilities could lead to a compression in net interest margins, particularly if interest rates decrease or deposit betas increase, affecting net interest income.
  
• Dependence on mortgage finance volume growth amidst rate volatility and market conditions poses risks to achieving projected loan growth, potentially affecting overall loan growth, and contributing to earnings variability.

Valuation

• The analysts have a consensus price target of $77.615 for Texas Capital Bancshares 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 $90.0, and the most bearish reporting a price target of just $63.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $637.7 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $65.89, the analyst price target of $77.62 is 15.1% higher.
  
• 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.