Operational Improvements Will Unlock New US Banking Opportunities

Key Takeaways

• Operational improvements, enhanced credit quality, and strategic asset replacements are driving future earnings growth.
  
• Strong loan and deposit growth pipeline positions the company for increased revenue and net interest income.
  
• Economic and market challenges, including office vacancies and higher tax rates, could limit West Bancorporation's revenue growth and profitability.

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 has experienced a 35% increase in first-quarter earnings compared to the previous year, driven by improved margins and excellent credit quality. This operational improvement is expected to positively impact future earnings growth.
  
• A strong pipeline for loan and deposit growth indicates potential revenue increases, suggesting the company is well-positioned to capitalize on future lending opportunities and enhance its earnings.
  
• Net interest margin has increased, largely due to reductions in deposit costs, which is anticipated to continue positively affecting net margins. This improved margin environment is expected to contribute to stronger future earnings.
  
• The strategy of replacing paid-off lower-yield assets with higher-yield loans is expected to enhance revenue generation and improve the overall yield of the loan portfolio, supporting future revenue and earnings growth.
  
• Continued success in attracting significant retail deposits and high-value commercial deposits is expected to bolster the company's financial position, contributing to stable revenue streams and potentially increased net interest income.

West Bancorporation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming West Bancorporation's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.5% today to 36.4% in 3 years time.
• Analysts expect earnings to reach $41.8 million (and earnings per share of $2.41) by about May 2028, up from $26.1 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 9.9x on those 2028 earnings, down from 12.8x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

West Bancorporation Future Earnings Per Share Growth

Risks

• Economic uncertainty and potential supply disruptions could lead to decreased profitability for West Bancorporation's C&I customers, potentially impacting the bank’s future revenue.
  
• The office property market is deteriorating with significant vacancies, which could weaken tenant positions and impact commercial real estate loan performance, affecting net margins and earnings.
  
• Deposit growth was flat in the first quarter of 2025, and the bank anticipates it will be challenging to further reduce deposit costs, potentially limiting improvements in net interest margins.
  
• There were significant asset payoffs and refinance activity, with potential limitations on loan growth if new opportunities do not exceed planned payoffs, impacting revenue.
  
• The expiration of tax credits has increased the effective tax rate, which can decrease net income and impact earnings growth.

Valuation

• The analysts have a consensus price target of $20.0 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 $114.7 million, earnings will come to $41.8 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $19.72, the analyst price target of $20.0 is 1.4% 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.