Margin Improvements And Hiring New Talent Will Strengthen Future Earnings Capacity

Key Takeaways

• Margin improvements and balance sheet repositioning could enhance earnings capacity and increase net interest income through effective deposit cost management.
  
• Hiring new talent aims to boost operating efficiency and diversify revenue, while increasing low-cost funding holds potential for growth.
  
• Reliance on deposit growth and CRE exposure present earnings risks amidst challenging economic and market conditions.

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 is experiencing margin improvement due to proactive management of deposit costs, which should help increase net margins.
  
• Strategic repositioning of the balance sheet and actively pushing out high-cost deposits is expected to improve their earnings capacity.
  
• The hiring of new talent from major banks could lead to higher operating efficiencies and revenue growth in new business segments over the next few years.
  
• An increase in their NIDDA (non-interest-bearing demand accounts) with strong pipeline expectations suggests potential growth in low-cost funding, which could positively impact net interest income.
  
• The company plans to continue balance sheet transformation, potentially leading to a better loan mix and higher short
• to medium-term margins.

BankUnited Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BankUnited's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $279.5 million (and earnings per share of $3.96) by about December 2027, up from $180.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $210 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2027 earnings, down from 16.0x today. This future PE is greater than the current PE for the US Banks industry at 12.5x.
• Analysts expect the number of shares outstanding to decline by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

BankUnited Future Earnings Per Share Growth

Risks

• Concerns related to CRE (Commercial Real Estate) exposure, particularly in the office sector, could create risk if economic conditions worsen. This may negatively impact the loan performance and increase provisions, affecting net margins and earnings.
  
• Challenges in achieving anticipated loan growth during market-sensitive times could limit revenue streams, restricting earnings growth and potentially impacting net interest margins.
  
• The mention of two notable loans moving into non-performing status due to episodic industry-specific issues presents a credit risk that could affect earnings if such instances increase.
  
• The proactive steps to manage deposit costs in response to the interest rate environment involve risk if market conditions shift unexpectedly, potentially impacting net interest income.
  
• The reliance on future deposit growth strategies, particularly regarding NIDDA (non-interest-bearing deposit accounts), involves uncertainty and could threaten revenue and profit growth if economic conditions or competitive pressures change.

Valuation

• The analysts have a consensus price target of $42.75 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 $49.0, 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 2027, revenues will be $1.2 billion, earnings will come to $279.5 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $38.61, the analyst's price target of $42.75 is 9.7% 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.