Commercial Bank Will Reduce Debt And Expenses To Strengthen Future Performance

Key Takeaways

• Cadence Bank is poised for revenue growth through new loan originations and improved net interest margins from favorable economic conditions and loan repricing.
  
• Strategic financial moves, including debt reduction and expense management, aim to enhance earnings and operating efficiency, supporting net margin expansion.
  
• Increasing nonaccrual loans, high deposit costs, and operational challenges may pressure net margins and hinder revenue growth if not effectively managed.

Catalysts

Provides commercial banking and financial services.

• Cadence Bank is optimistic about new loan originations outpacing payoffs in the future, owing to a strong and diverse loan pipeline and favorable economic conditions in their operating areas. This is likely to positively impact revenue growth.
  
• The bank expects continued improvement in net interest margin in the near term, thanks to stabilized deposit costs and the repricing of loans at higher rates. This is expected to enhance net margins.
  
• Cadence Bank plans to call $215 million of subordinated debt in November and leverage core deposits to replace expensive borrowings, which is anticipated to improve earnings by reducing interest expenses.
  
• The bank is working to reduce deposit costs as interest rates decline, aiming to maintain or grow core deposits while managing costs effectively. This should support net margin expansion.
  
• Cadence Bank is committed to strong expense management, anticipating a reduction in expenses for the full year 2024 compared to 2023, which should improve operating efficiency and contribute to net margin expansion.

Cadence Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cadence Bank's revenue will grow by 21.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 32.6% in 3 years time.
• Analysts expect earnings to reach $736.9 million (and earnings per share of $4.0) by about December 2027, up from $117.7 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 12.0x on those 2027 earnings, down from 55.5x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

Cadence Bank Future Earnings Per Share Growth

Risks

• The increase in nonaccrual loans due to the migration of a handful of previously criticized credits may indicate underlying credit quality issues, potentially leading to higher provisions for credit losses and impacting net margins.
  
• The competitive environment in deposit markets, leading to stabilized but high deposit costs, could pressure net interest margins if the bank is unable to effectively manage its interest rate spreads.
  
• The flat loan balance growth due to payoff pressures, despite strong new loan commitments, might limit revenue growth if the loan growth does not outpace payoffs in the future.
  
• The variability and potential decline in specific noninterest revenue streams, such as a significant drop in mortgage banking revenue, could affect total revenue growth, especially if other fee income does not offset these declines.
  
• Legal and miscellaneous expenses have increased, reflecting operational challenges that might impact operating efficiency and net margins if not controlled.

Valuation

• The analysts have a consensus price target of $40.05 for Cadence Bank 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 $46.0, and the most bearish reporting a price target of just $34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.3 billion, earnings will come to $736.9 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of $35.72, the analyst's price target of $40.05 is 10.8% 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.