Integration With Heartland Will Create New Opportunities And Improve Operational Efficiency

Key Takeaways

• The Heartland acquisition is expected to boost UMB Financial’s balance sheet and enhance revenue through improved asset quality and operational synergies.
  
• Strong fee income growth in private wealth and institutional assets supports future revenue, with a focus on market penetration for loan growth.
  
• The acquisition's uncertainties, noncore credit risks, and high conversion costs could hinder revenues, margins, and profitability amidst fluctuating market conditions.

Catalysts

Operates as the bank holding company that provides banking services and asset servicing in the United States and internationally.

• The completion of the HTLF acquisition is expected to enhance UMB Financial’s deposits and balance sheet structure, potentially increasing future revenue and improving net margins by leveraging Heartland's franchises.
  
• The anticipation of a larger, more efficient balance sheet post-acquisition, including a favorable resolution of non-core loans and bonds, is expected to bolster earnings through improved asset quality and reduced non-performing loans.
  
• UMB Financial's strong fee income growth across various segments, such as private wealth, institutional assets, and healthcare savings accounts, is likely to support higher future revenue and earnings.
  
• The focus on market penetration and leveraging UMB’s sales force (particularly in underpenetrated areas) presents opportunities for loan growth and increased revenue in the mid-term following the Heartland integration.
  
• Expected cost savings and operational synergies post-acquisition are anticipated to enhance net margins and support earnings growth in the coming years.

UMB Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UMB Financial's revenue will grow by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.1% today to 39.6% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $12.49) by about March 2028, up from $441.2 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 12.9x on those 2028 earnings, down from 16.9x 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 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

UMB Financial Future Earnings Per Share Growth

Risks

• The pending acquisition of HTLF involves assumptions and uncertainties, which can impact the expected financial synergies, potentially affecting revenue and earnings if the integration does not go as planned or anticipated synergies are not realized.
  
• Heartland had noncore loans and bonds that led to net charge-offs and lower loan balances, indicating potential credit risk issues, which may affect net margins and earnings if not managed well post-acquisition.
  
• The process of resolving and selling identified noncore bonds and loans might not go smoothly, potentially impacting capital ratios and loan balances, thus affecting future revenue growth.
  
• The anticipated expenses related to system conversions and branch network optimizations could involve higher-than-expected costs, potentially impacting net margins and overall profitability.
  
• Market and economic conditions may alter projections for interest margins, especially if there are rate changes or pressures on loan yields that could affect net interest income and overall earnings.

Valuation

• The analysts have a consensus price target of $137.333 for UMB 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 $150.0, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of $102.36, the analyst price target of $137.33 is 25.5% 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.