Strategic Expansions And Nimble Financial Management Poised To Propel Growth Amid Challenges

Key Takeaways

• SouthState's anticipated net interest margin inflection and strategic market expansion indicate potential revenue and customer growth without specifying financial figures.
  
• Controlled expenses and efficient capital management are expected to support net margin expansion, while loan growth outperforms forecasts, hinting at increased interest income and profits.
  
• Facing challenges with deposit growth, increased credit risk, and exposure to sector-specific and interest rate risks that could impact future profitability and growth.

Catalysts

Operates as the bank holding company for SouthState Bank, National Association that provides a range of banking services and products to individuals and companies.

• The anticipated inflection of net interest margin (NIM) suggests that SouthState may see improved interest income, leading to potential revenue growth as the cost of deposits slows and loan yields increase.
  
• The strategic expansion into new markets with demographic and income migration profiles matching current markets could drive new customer acquisition and loan growth, impacting future revenue positively.
  
• The Independent Financial transaction is expected to offer 27% earnings per share accretion, indicating significant future earnings growth through capital management strategies and unlocking earnings potential of the combined entities' loan portfolios.
  
• A focus on controlled expenses and efficient capital management, as demonstrated by well-managed noninterest expenses and strategic use of surplus capital, is likely to support net margin expansion.
  
• Loan growth outperforming forecasts, particularly from middle-market companies and in sectors like C&I credits, suggests robust demand that could lead to increased interest income and potentially higher profits.

Assumptions

• Analysts are assuming SouthState's revenue will grow by 25.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.4% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $9.25) by about September 2027, up from $478.4 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 9.5x on those 2027 earnings, down from 14.9x today. This future PE is lower than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.3% 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 challenge with deposit growth and the ongoing struggle in the deposit environment could lead to higher funding costs or insufficient funding to support loan growth, potentially affecting net interest margins and future profitability.
  
• The mentioned increase in non-performing loans (NPLs) centered around one significant loan, despite having substantial guarantors, suggests credit risk may impact the provision for loan losses and thereby affect earnings.
  
• The potential impact of interest rate cuts on the net interest margin (NIM) implies a reliance on future rate movements, which introduces interest rate risk that could affect net interest income, especially if the rate cuts do not occur as anticipated or impact differently.
  
• The discussion around commercial real estate (CRE) lending, especially caution around office and assisted living spaces, highlights sector-specific risk. This could affect loan performance in these segments, impacting loan loss provisions and potentially limiting growth in lucrative markets.
  
• The integration challenges and capital management strategies related to the acquisition of Independent Financial suggest operational and strategic risk, which could affect earnings if the expected synergies, such as the anticipated improvement in NIM, do not materialize as planned.

Valuation

• The analysts have a consensus price target of $106.53 for SouthState 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 $112.0, and the most bearish reporting a price target of just $88.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $93.33, the analyst's price target of $106.53 is 12.4% 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.