Expanding Financial Services And Share Buybacks Promise Growth, Despite Looming Earnings Pressure

Key Takeaways

• Expansion in net interest income and strategic introduction of specialized financial services across various locations hint at potential revenue growth and diversification.
  
• Continued share repurchase programs and emphasis on operating efficiency, combined with a growing fee-based income structure, signal confidence in sustainable profitability and earnings growth.
  
• Dependence on high interest-earning asset volumes, increasing deposit costs, forecasts of declining deposit levels, rising non-interest expenses, and catastrophic event risks could negatively impact revenue and earnings.

Catalysts

Provides a range of community, commercial, and private banking services to individuals and small to medium-sized businesses.

• An expanding net interest income, influenced by a higher volume of average interest-earning assets and increased yields, indicates potential for revenue growth through further asset optimization and deposit volume increases.
  
• Continual share repurchase programs underscore the company's confidence in its growth and operational efficiency, likely leading to an enhancement in earnings per share by reducing the number of shares outstanding.
  
• The introduction of specialized financial services in diverse geographic locations including the Bahamas, Switzerland, Singapore, and the UK, especially in high-end mortgage lending, may amplify revenue streams and diversify income sources.
  
• Increment in core non-interest income, particularly from trust fees and equity pickups, suggests a growing and potentially lucrative fee-based income structure, enhancing overall revenue stability and margins.
  
• Strategic focus on operating efficiency and potential M&A activities, along with organic growth in line with blended GDP rates of its operational jurisdictions, signifies opportunities for bolstered profitability and sustained earnings growth.

Assumptions

• Analysts are assuming Bank of N.T. Butterfield & Son's revenue will decrease by -1.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.1% today to 32.1% in 3 years time.
• Analysts expect earnings to reach $178.2 million (and earnings per share of $4.99) by about September 2027, down from $206.3 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 9.9x on those 2027 earnings, up from 8.2x 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 decline by 8.09% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The increase in net interest income is dependent on higher volumes of interest-earning assets, suggesting that any significant decrease in deposit volumes or adverse shifts in interest-earning asset yields could impact revenue negatively.
  
• Rising cost of deposits, as indicated by an increase to 189 basis points from 178 basis points, suggests pressure on net interest margins which could impact net margins and earnings negatively if the trend continues.
  
• A forecasted decline in deposit levels to between $11.5 billion and $12 billion, as stated, signals a potential risk to the stability of funding and liquidity, which could constrain lending capacity and revenue growth.
  
• Heightened non-interest expenses, primarily due to higher performance-based incentive accruals and inflationary increases, pose a risk to net earnings especially if the bank fails to manage these increases effectively in future quarters.
  
• The bank's exposure to catastrophic events like hurricanes, as noted with Hurricane Beryl, represents a geographical and operational risk that could lead to direct financial loss or disrupt business operations, impacting revenue and asset quality.

Valuation

• The analysts have a consensus price target of $42.75 for Bank of N.T. Butterfield & Son 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 $555.2 million, earnings will come to $178.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $37.6, the analyst's price target of $42.75 is 12.0% 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.