Fed Easing And Deposit Growth Will Boost Future Lending Activities

Key Takeaways

• Record loan production and new revenue opportunities indicate potential for sustained growth in revenue and earnings through expanded lending activities.
  
• Margin enhancement expected from Fed easing and increased deposit growth, boosting net interest margin, financial stability, and profit margins.
  
• Elevated loan loss provisions, declining interest rates, sector-specific risks, and broker deposit reliance pose challenges to earnings, margin stability, and competitiveness.

Catalysts

Operates as the bank holding company for Live Oak Banking Company that provides various banking products and services in the United States.

• Record loan production and a strong pipeline past all-time highs indicate sustained future growth in lending, which can drive revenue and earnings upwards.
  
• Investments in new revenue opportunities, such as the small dollar SBA lending program and embedded banking, suggest significant future revenue growth beyond existing lending activities.
  
• Margin expansion potential due to expected Fed easing, leading to lower deposit costs over time while maintaining strong loan growth can enhance net interest margin and net interest income.
  
• Increased deposit growth, especially from stickier business deposits, can provide tailwinds to net interest income and margin, enhancing financial stability and growth.
  
• A strengthening secondary market for loan sales, with strong demand for SBA and USDA loans, can improve gain on sale income, thereby boosting revenue and profit margins.

Live Oak Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Live Oak Bancshares's revenue will grow by 24.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.6% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $202.2 million (and earnings per share of $4.35) by about December 2027, up from $83.7 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 13.2x on those 2027 earnings, down from 21.4x 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 grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Live Oak Bancshares Future Earnings Per Share Growth

Risks

• The elevated provision for loan losses, where 40% was due to impairments in three specific relationships, suggests potential credit quality issues which could negatively impact net earnings.
  
• Concerns regarding the impact of declining interest rates on net interest margin and net interest income indicate potential future pressure on earnings from a narrowing of spreads as liabilities reprice faster than assets.
  
• Heavy reliance on project finance, especially in sectors like solar energy and hotels, may expose the company to sector-specific risks that could affect revenue stability and net margins.
  
• The uncertainty and potential timing of Federal Reserve interest rate cuts could pose challenges in managing deposit pricing and margins, impacting revenue and market competitiveness.
  
• Growing dependence on broker deposits for short-term liquidity and funding could increase cost of funds and pressure margins, thereby affecting profitability if interest rates become unfavorable.

Valuation

• The analysts have a consensus price target of $49.0 for Live Oak Bancshares 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 2027, revenues will be $787.2 million, earnings will come to $202.2 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $39.6, the analyst's price target of $49.0 is 19.2% 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.