Growing Non-Interest-Bearing Deposits Will Strengthen Funding Mix

Key Takeaways

• Strategic focus on growing non-interest-bearing deposits and managing funding costs aims to improve net interest margin and boost earnings.
  
• Portfolio transformation with a focus on core loans and asset management expected to enhance return on assets and profitability ratios.
  
• Increasing competition, potential higher provisions, and limited balance sheet growth may pressure BankUnited's net interest income and profitability amidst policy-related uncertainties.

Catalysts

Operates as the bank holding company for BankUnited, a national banking association that provides a range of banking services in the United States.

• BankUnited's strategic emphasis on growing non-interest-bearing demand deposits (NIBDDAs) aims to improve its funding mix, reducing funding costs and positively impacting net interest margin (NIM) over time.
  
• The successful reduction in the cost of interest-bearing deposits and the anticipated double-digit growth in NIBDDAs are expected to enhance NIM, potentially exceeding 3% by the end of 2025, boosting earnings.
  
• Continued focus on loan portfolio transformation, with growth in core commercial and real estate loans while reducing noncore portfolios, aims to optimize asset mix and enhance net interest income (NII) growth.
  
• The bank's focus on improving return on assets (ROA) and return on equity (ROE) through balance sheet and asset yield management is expected to drive profitability ratios closer to industry norms, supporting higher earnings.
  
• BankUnited's strategic objectives to grow deposits mid-single digits and maintain stable to modest growth in the balance sheet, driven by asset quality stability and regulatory environment improvements, provide a framework for sustained revenue and earnings growth.

BankUnited Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BankUnited's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.8% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $301.0 million (and earnings per share of $3.89) by about January 2028, up from $228.4 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 13.6x on those 2028 earnings, up from 13.4x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

BankUnited Future Earnings Per Share Growth

Risks

• The net interest margin is only expected to exceed 3% in the second half of 2025, suggesting prolonged periods of lower revenues from interest-earning activities until then.
  
• Increasing competition in lending is leading to tighter spreads, which may compress net interest income if competitive pressures continue to intensify, reducing overall earnings.
  
• The potential for higher provision in 2025 due to portfolio shifts towards commercial loans could lead to increased expenses affecting net margins and net income.
  
• The flat or minor balance sheet growth indicates limited opportunities for revenue generation from asset growth in the near-term, potentially impacting revenue and profitability.
  
• Uncertainty regarding policy changes and their impact on trade might pose additional risks to the financial outlook, potentially affecting loan portfolios and future earnings.

Valuation

• The analysts have a consensus price target of $43.42 for BankUnited based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $301.0 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of $40.83, the analyst's price target of $43.42 is 6.0% 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.