Robust Deposit Strategy And Critical Investments Power A Bright Earnings Outlook

Key Takeaways

• West Bancorporation's deposit strategy and expected Fed rate cuts aim to enhance net interest margin and boost future earnings.
  
• Strong credit quality and strategic investments are poised to drive growth in commercial and industrial lending, supporting stable revenue expansion.
  
• Modest loan demand and dependence on temporary deposit funds pose risks to future revenue streams and net interest margins due to potential fluctuations and commitments.

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.

• West Bancorporation has a robust deposit gathering strategy, which has resulted in a 7% increase in core deposit balances year-to-date. This growth in deposits could support future loan growth and improve the net interest margin, thus positively impacting revenue and earnings.
  
• The company anticipates additional benefits from future Fed rate cuts, allowing for lower deposit rates in high-cost sectors. This is expected to enhance the net interest margin, contributing to increased earnings.
  
• West Bancorporation’s strong credit quality, with minimal past due loans and a stress-tested commercial real estate portfolio, supports a stable financial outlook and reduces the risk of credit losses, thus maintaining healthy net margins.
  
• The strategic investment in facilities in Minnesota and a relationship-based approach in those regions are positioning the company for growth in commercial and industrial (C&I) lending, which could improve revenues through increased loan demand.
  
• The company plans to reduce rates on CDs and other deposit products following the Fed rate cut, which is expected to provide further expansion in net interest margin in the fourth quarter, thereby positively influencing earnings.

West Bancorporation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming West Bancorporation's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.8% today to 39.2% in 3 years time.
• Analysts expect earnings to reach $44.3 million (and earnings per share of $2.59) by about November 2027, up from $21.5 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 10.8x on those 2027 earnings, down from 18.6x today. This future PE is lower than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

West Bancorporation Future Earnings Per Share Growth

Risks

• Loan demand is not strong, showing only modest growth which could impact future revenue streams.
  
• Unfunded commitments on large construction projects may not materialize as expected, potentially affecting earnings growth.
  
• Anticipated payoffs from sold businesses and construction advances turning into final products might lead to lower outstanding loan balances, impacting net margins.
  
• Deposit growth partially relies on temporary funds expected to be withdrawn in 2025, posing potential risks to stable revenue generation from deposits.
  
• The potential negative impact of fluctuating interest rates and rate sensitivity on repricing opportunities and deposit cash flows could affect net interest margins.

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 2027, revenues will be $113.0 million, earnings will come to $44.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $23.72, the analyst's price target of $23.0 is 3.1% 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.