Expanding Into Commodities Hedging And Fintech Will Diversify Income Streams

Key Takeaways

• Investment in technology and expanded capital markets offerings could bolster revenue growth through increased customer acquisition and diversified noninterest income streams.
  
• Strategic cost management and portfolio restructuring may enhance net margins and interest income by reducing operating expenses and optimizing asset yields.
  
• High-growth strategies and expansion into new business lines could increase operational risks, affecting net margins, noninterest income, and overall profitability.

Catalysts

A bank and financial holding company, provides a range of financial products and services primarily to consumers, corporations, governments, and small- to medium-sized businesses in the United States.

• F.N.B. is enhancing its capital markets offerings to include commodities hedging, public finance, and commercial investment banking services, potentially increasing its noninterest income streams. This diversification is likely to positively impact revenue.
  
• The company is investing in technology to improve customer experience, such as embedding fintech solutions in its eStore to streamline onboarding and foster primary bank relationships, which could bolster revenue growth through increased customer acquisition and retention.
  
• F.N.B. has completed a portfolio restructuring by selling lower-yielding securities and reinvesting in higher yielding ones, enhancing its interest income potential and thus positively affecting net interest income and margins.
  
• Strategic initiatives aimed at cost management, including leveraging automation and AI for operational efficiency, may help improve net margins through reduced operating expenses.
  
• The significant loan growth and deposit accretion, outpacing industry trends, could improve earnings by providing a robust base for lending activities, which typically drive a bank’s profitability.

F.N.B Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming F.N.B's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.3% today to 33.1% in 3 years time.
• Analysts expect earnings to reach $701.8 million (and earnings per share of $1.92) by about January 2028, up from $459.3 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 11.7x on those 2028 earnings, down from 12.3x 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 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

F.N.B Future Earnings Per Share Growth

Risks

• The reliance on non-GAAP financial measures and forward-looking statements may lead to discrepancies or over-optimistic projections in actual financial results, impacting investor confidence and earnings.
  
• While the loan and deposit growth rates outpace the industry, high-growth strategies can lead to increased operational risk and potential overextension, potentially impacting net margins.
  
• The investment in fintech and new technology, while offering growth opportunities, represents a significant cost and may not yield immediate returns, affecting overall expense ratios and net income.
  
• The stable yet increasing delinquency and net charge-offs indicate potential risks in loan quality management, which could increase provision expenses and reduce net earnings.
  
• The rapid expansion into new business lines (e.g., commodities hedging, public finance) and anticipated quick breakeven points may pose execution risks, potentially affecting noninterest income and overall profitability.

Valuation

• The analysts have a consensus price target of $18.62 for F.N.B 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 $2.1 billion, earnings will come to $701.8 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.5%.
• Given the current share price of $15.67, the analyst's price target of $18.62 is 15.9% 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.