High-Quality Loan Growth Signals Bright Future Despite Analysts Predicting Shrinking Margins And Earnings Challenges

Key Takeaways

• Strong loan growth and strategic deposit management are expected to drive future revenue growth and enhance earnings through improved net margins.
  
• Impressive tangible book value growth and the recruitment of top-tier professionals indicate robust financial health and operational efficiency, positively impacting productivity and margins.
  
• Customers Bancorp faces liquidity, financial stability, and growth challenges due to deposit mix concerns, concentration risks, aggressive expansion, and regulatory scrutiny.

Catalysts

Operates as the bank holding company for Customers Bank that provides financial products and services to individual consumers, and small and middle market businesses.

• The company has been achieving strong high-quality loan growth at a pace of 11% annualized, which is quite differentiated from industry trends. This is expected to drive future revenue growth.
  
• Customers Bancorp has been executing on its deposit transformation strategy, using core commercial deposit growth to repay higher-cost consumer deposits and reducing wholesale CDs, leading to a reduced average cost of deposits. This operational shift is likely to improve net margins and enhance earnings.
  
• The net interest margin of the bank expanded by a robust 19 basis points with an expectation of continued expansion, indicating an operationally efficient management of assets and liabilities. This will positively impact net interest income.
  
• Tangible book value per share has seen impressive growth, indicating robust underlying value and financial health that could support future earnings expansion.
  
• The bank has managed to recruit top-tier professionals, signaling strong internal operations and potentially leading to enhanced operational efficiencies. This could have a positive impact on productivity and, ultimately, on revenue and margins.

Assumptions

• Analysts are assuming Customers Bancorp's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.4% today to 30.6% in 3 years time.
• Analysts expect earnings to reach $240.8 million (and earnings per share of $7.53) by about October 2027, down from $241.4 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 10.0x on those 2027 earnings, up from 6.0x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Risks

• There are concerns about the ongoing need for remixing high-cost and concentrated deposits with higher quality deposits, which could pressure the bank's liquidity management and interest expense.
  
• Concentration risks in specific verticals, despite proactive attempts to limit loan and deposit levels, can introduce volatility in earnings and asset quality, impacting the bank's financial stability.
  
• The aggressive expansion and dependence on new banking teams to drive deposit growth introduces execution risk, potentially affecting the bank’s operational costs and efficiency ratios.
  
• The unknown pace and success rate of integrating newly acquired clients from banking teams might slow down expected deposit growth and revenue projections, impacting net interest margins.
  
• Regulatory commentary on deposits from specific sectors like crypto and venture capital poses a risk to future growth and compliance costs, which could impact both net interest income and noninterest income.

Valuation

• The analysts have a consensus price target of $64.22 for Customers Bancorp 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 $82.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $787.7 million, earnings will come to $240.8 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of $45.42, the analyst's price target of $64.22 is 29.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.