Repositioning Balance Sheets And Expanding Banking Teams Will Unlock Opportunities

Key Takeaways

• Expansion into new markets and enhanced product offerings aim to capture market share, improve customer relationships, and drive revenue growth.
  
• Strategic balance sheet repositioning, including loan sales and reduced deposit costs, is expected to improve net interest margins and profitability.
  
• Economic uncertainties and policy changes threaten revenue, with trade impacts reducing loan demand and competitive pressures squeezing real estate loan margins and growth.

Catalysts

A bank holding company, provides various banking and nonbanking products and services to individuals and businesses in Wisconsin, Illinois, Missouri, and Minnesota.

• Expansion of the commercial banking team, particularly in new markets like Kansas City and underserved metro areas like Milwaukee, Minneapolis, and Chicago, positions the company to take market share and drive loan growth, potentially increasing revenues.
  
• Completion of Phase 2 of the strategic plan, including enhancements in product offerings and customer experience, could lead to increased consumer and commercial customer satisfaction, supporting revenue growth through lower-cost deposit growth and deeper client relationships.
  
• Profitability is expected to benefit from the repositioning of the balance sheet, including the sale of $700 million in residential mortgage loans, reducing lower-yielding loan concentrations and enabling higher net interest margins and earnings growth.
  
• The anticipated growth in Auto Finance and Commercial and Industrial loan segments, coupled with robust credit quality and low charge-offs, could support stable revenue expansion and enhance net interest income.
  
• Strategic reductions in time deposit costs, with $8 billion in CDs maturing within the next 12 months, offer opportunities for cost savings on liabilities, leading to improved net interest margins and earnings.

Associated Banc-Corp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Associated Banc-Corp's revenue will grow by 24.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 35.1% in 3 years time.
• Analysts expect earnings to reach $661.5 million (and earnings per share of $2.99) by about April 2028, up from $131.5 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 9.6x on those 2028 earnings, down from 27.9x 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 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 6.4%, as per the Simply Wall St company report.

Associated Banc-Corp Future Earnings Per Share Growth

Risks

• The potential impacts of tariffs and trade policy uncertainties could negatively affect customer activities, leading to decreased loan demand and impacting revenue growth.
  
• Rising competition and spread compression in commercial real estate could lead to lower margins and squeezed earnings in that segment.
  
• Anticipated elevated payoffs in commercial real estate loans may reduce overall loan growth projections, impacting total interest income.
  
• Slow market repricing for CDs could mean less margin benefit from the expected decrease in rates, limiting net interest margin improvement and affecting net interest income.
  
• Economic uncertainties and the prospect of rate cuts could undermine asset yields, hindering net interest income if not entirely proactive measures are taken to offset the effects.

Valuation

• The analysts have a consensus price target of $26.444 for Associated Banc-Corp 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 $1.9 billion, earnings will come to $661.5 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $22.41, the analyst price target of $26.44 is 15.3% 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.