Targeting $12 Billion In C&I Loans Will Expand Commercial Lending

Key Takeaways

• Launching a new specialty deposit and payment solutions vertical is expected to enhance commercial capabilities and boost revenue.
  
• Repositioning the balance sheet by adjusting loan portfolios should improve net interest margins and drive revenue growth.
  
• Aggressive loan growth and asset sensitivity expose the company to credit and interest rate risks, potentially impacting margins and earnings amid increased competition.

Catalysts

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

• The launch of a new specialty deposit and payment solutions vertical is expected to enhance Associated Banc-Corp's commercial capabilities and potentially increase revenue from innovative financial services offerings.
  
• The company's balance sheet repositioning, including selling low-yield loans and acquiring higher-yield credit card balances, is anticipated to improve net interest margins in 2025.
  
• A strong focus on increasing Commercial & Industrial (C&I) loan growth, with a target of $1.2 billion projected in 2025, is likely to drive higher interest income and overall revenue.
  
• Increased efforts in growing core customer deposits by 4% to 5% in 2025 could reduce funding costs, positively impacting net margins and supporting loan growth.
  
• Continued expansion and investment in the commercial team with high-quality relationship managers should lead to strong revenue growth through strengthened customer relationships and increased commercial business.

Associated Banc-Corp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Associated Banc-Corp's revenue will grow by 25.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 36.9% in 3 years time.
• Analysts expect earnings to reach $696.1 million (and earnings per share of $4.08) by about January 2028, up from $111.6 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 8.2x on those 2028 earnings, down from 36.2x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.55%, as per the Simply Wall St company report.

Associated Banc-Corp Future Earnings Per Share Growth

Risks

• The recent balance sheet repositioning resulted in significant nonrecurring losses, including a $130 million loss from mortgage sales and a $148 million loss from security sales, which could negatively impact net margins and future earnings if similar actions are necessary again.
  
• The aggressive loan growth strategy, particularly in the commercial and business lending segments, could involve heightened credit risk, potentially affecting net interest income and overall earnings if credit quality deteriorates.
  
• The company's asset sensitivity, while managed with interest rate swaps and securities repositioning, still poses a risk in a decreasing interest rate environment, which could impact net interest margin and earnings negatively if rate cuts materialize.
  
• Increased competition, especially from large banks entering metro markets, could result in pricing pressures on loans, affecting Associated Banc-Corp’s ability to grow net interest income and maintain earning levels.
  
• The company's strategy heavily relies on organic deposit growth to fund loan growth; any failure to achieve forecasted deposit increases could lead to increased reliance on more expensive wholesale funding, affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $27.89 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 $696.1 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $24.65, the analyst's price target of $27.89 is 11.6% 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.