Bond Repricing And Merger Activity Will Secure Texas And Oklahoma Markets

Key Takeaways

• Improved net interest margins and merger benefits are expected to enhance earnings and net interest income over time.
  
• Economic optimism in Texas and Oklahoma boosts loan growth, customer engagement, and revenue potential.
  
• Sluggish loan growth and market volatility may impact net interest income and asset quality, while M&A strategies could face delays due to external conditions.

Catalysts

Operates as bank holding company for the Prosperity Bank that provides financial products and services to businesses and consumers.

• The continued improvement in the net interest margin to a more normalized level as the bank's bond and loan portfolios reprice is expected to positively impact net interest income and overall earnings.
  
• The merger with Lone Star State Bancshares is contributing to growth in loans and deposits, which should enhance revenue and net income over time.
  
• Prosperity Bancshares maintains a high level of noninterest-bearing deposits (34.5% of total deposits), which supports a lower cost of funds and positively affects net interest income margins.
  
• The optimistic economic outlook in Texas and Oklahoma, including employment and wage growth, provides a favorable environment for loan growth and customer engagement, which should lead to increased revenue.
  
• Active discussions regarding potential acquisitions provide opportunities for external growth that could be accretive to earnings and enhance shareholder value.

Prosperity Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prosperity Bancshares's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.2% today to 45.9% in 3 years time.
• Analysts expect earnings to reach $692.5 million (and earnings per share of $7.44) by about April 2028, up from $499.2 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 13.2x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.71% 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.

Prosperity Bancshares Future Earnings Per Share Growth

Risks

• The deliberate reduction in acquired loans, along with indications of sluggish loan growth and uncertainty due to tariffs, could slow desired loan growth, impacting both revenue and net interest income.
  
• Decreased deposits linked to seasonality and mentioned reductions in high-cost borrowings suggest potential fluctuations in available funds, affecting liquidity management and interest expenses.
  
• Market volatility and geopolitical uncertainties like tariffs could lead to unpredictable credit conditions and challenges in accurately pricing risk, possibly affecting asset quality and loan reserve requirements.
  
• Despite strong deposit metrics, any failure to manage deposit costs effectively amid fluctuating interest rates could affect net interest margins negatively.
  
• Though there is confidence in M&A as a capital deployment strategy, market conditions or psychological effects on potential sellers due to stock market volatility might delay acquisitions, impacting growth strategies and earnings per share.

Valuation

• The analysts have a consensus price target of $81.833 for Prosperity Bancshares 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 $95.0, and the most bearish reporting a price target of just $77.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $692.5 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $68.51, the analyst price target of $81.83 is 16.3% 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.