Expansion In Channel Islands And Singapore Will Open Future Opportunities, But Rising Costs Could Impact Earnings

Key Takeaways

• Stabilizing interest margins and strategic liquidity deployment suggest potential gains in earnings and revenue enhancement.
  
• Growth in various regions and strategic share repurchase could enhance market share and shareholder value.
  
• Rising deposit costs, salary inflation, and an uncertain rate environment could compress margins and affect earnings stability.

Catalysts

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

• The stabilization of net interest margin due to decreased market rates and deposit costs suggests the potential for margin improvement, positively impacting net margins and earnings.
  
• Expansion in investment volumes and the deployment of excess liquidity into higher-yielding securities could enhance net interest income and revenue.
  
• Growth in the retail banking presence in the Channel Islands and continued build-out of the Singapore trust business indicate potential revenue growth through increased market share and new client acquisitions.
  
• The Board's approval for share repurchase authorization in 2025 signals capital management strategies aimed at increasing shareholder value and potentially boosting earnings per share.
  
• Continued economic growth in Bermuda and Cayman, driven by tourism and international financial services, is expected to support future growth in revenue and profitability.

Bank of N.T. Butterfield & Son Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of N.T. Butterfield & Son's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.3% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $186.1 million (and earnings per share of $4.96) by about March 2028, down from $216.3 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 9.7x on those 2028 earnings, up from 7.6x today. This future PE is lower than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Bank of N.T. Butterfield & Son Future Earnings Per Share Growth

Risks

• The decrease in net interest margin from 2.80% in 2023 to 2.64% in 2024, although recently stabilizing, could indicate potential pressure on future earnings if market conditions change unfavorably.
  
• Rising costs of deposits from 140 basis points in 2023 to 183 basis points in 2024 could continue to compress net margins if not effectively managed.
  
• There are inflationary pressures on salaries and anticipated continued investment in technology and specialist roles, likely elevating noninterest expenses and potentially reducing net income.
  
• Exposure to the uncertain interest rate environment, including sensitivity to rate cuts and the associated impact on net interest income, might adversely affect earnings stability.
  
• Anticipated outflows of approximately $500 million in deposits could lower the balance sheet size, potentially impacting net interest income growth if not offset by other means.

Valuation

• The analysts have a consensus price target of $44.5 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 2028, revenues will be $587.8 million, earnings will come to $186.1 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $38.52, the analyst price target of $44.5 is 13.4% 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.