Capturing High-Value Retail Deposits Will Strengthen Core Funding

Key Takeaways

• Strong deposit growth and reduction in wholesale funding are expected to enhance net interest margins and boost earnings.
  
• Focus on high-value retail deposits and community engagement should support revenue growth and improve earnings stability.
  
• Dependency on forecasts, real estate risks, and investment losses create uncertainty in revenue, margins, and earnings, while funding and credit factors add potential constraints.

Catalysts

Operates as the financial holding company provides community banking and trust services to individuals and small- to medium-sized businesses in the United States.

• The company's exceptional deposit gathering success in 2024 has allowed for a reduction in expensive wholesale deposits, which is expected to improve the cost of funding and subsequently enhance net interest margins and earnings.
  
• West Bancorporation anticipates short-term rate reductions and significant asset repricing opportunities into 2025 and 2026, which should contribute to higher net interest income and an improved net interest margin.
  
• The company operates in thriving communities with strong economies, providing a solid pipeline for loan and deposit growth, which should positively impact revenue and potentially improve earnings stability.
  
• Strategic focus on capturing high-value retail deposits from business owners and key executives is expected to strengthen core deposits and reduce reliance on expensive wholesale funding, improving cost efficiencies and net margins.
  
• Continuous effort to build comprehensive banking relationships, along with strong credit quality and low past dues, is expected to maintain or improve net margins and support steady earnings growth.

West Bancorporation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming West Bancorporation's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.5% today to 35.7% in 3 years time.
• Analysts expect earnings to reach $38.9 million (and earnings per share of $2.25) by about January 2028, up from $24.0 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 12.3x on those 2028 earnings, down from 15.4x today. This future PE is about the same as the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

West Bancorporation Future Earnings Per Share Growth

Risks

• The reliance on forecasts for 2025 improvements, while positive, indicates uncertainty as projections may not materialize as expected, impacting future revenue and earnings.
  
• Concerns about commercial real estate risks, especially related to vacancies and debt service coverage, might necessitate increased provisions for credit losses, thereby affecting net margins and earnings.
  
• The $1.2 million loss from selling investment securities indicates investment risks and could signal potential challenges in achieving expected earn-back, impacting net income and overall financial health.
  
• While deposit growth helps reduce expensive wholesale funding, future interest rate changes could unpredictably alter funding costs and net interest margins, affecting profit potential.
  
• A slowing of new credit opportunities and high selectivity in the Minnesota market could constrain loan portfolio growth, potentially limiting revenue expansion.

Valuation

• The analysts have a consensus price target of $23.0 for West Bancorporation 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 $108.9 million, earnings will come to $38.9 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $22.05, the analyst's price target of $23.0 is 4.1% 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.