Online Banking And Lending Will Redefine SMB Financial Services

Key Takeaways

• Accelerating digital adoption and integrated services position NewtekOne to capture a dominant share of small business customers, driving exceptional recurring revenue growth and client retention.
  
• First-mover scale in tech-driven business lending enables NewtekOne to shape industry standards and achieve superior margins despite rising competition and consolidation.
  
• Rising competition, regulatory changes, economic vulnerability, operational challenges, and increased funding costs threaten profitability, efficiency, and long-term earnings in NewtekOne's core lending business.

Catalysts

Operates as the bank holding company for Newtek Bank, National Association that provides various business and financial solutions under the Newtek and NewtekOne brands to the small- and medium-sized business market.

• Analyst consensus expects improved margins and growth from NewtekOne's digital bank transition, yet this likely understates the potential for sustained industry-beating net interest margins and efficiency ratios, as the company's operating costs rise slowly even with rapid balance sheet expansion, leading to supernormal net margins and earnings growth.
  
• While consensus recognizes NewtekOne's technology-driven customer acquisition and underwriting processes, these digital capabilities are poised to dramatically outpace even optimistic expectations, capturing outsized market share among small businesses as traditional banks struggle to digitize, driving long-term revenue compounding significantly above industry averages.
  
• The accelerating digital transformation among small and medium-sized businesses is creating exponential demand for integrated, online-first financial services-NewtekOne's frictionless, fully digital bank and ecosystem is uniquely positioned to be the leading platform for these businesses, unlocking a customer acquisition runway that can drive outlier revenue growth for multiple years.
  
• By tightly integrating lending, payments, payroll, and merchant services within a unified digital platform, NewtekOne stands to both increase customer stickiness and dominate share of wallet, ultimately boosting average customer lifetime value and supporting a step-change increase in recurring, high-margin fee revenue streams.
  
• As industry consolidation squeezes out legacy and subscale competitors, NewtekOne's first-mover scale in alternative business lending and AI-driven credit risk can allow the company to set the standard for cost of capital and underwriting in this niche, potentially redefining industry profit pools and supporting structurally higher returns on equity.

NewtekOne Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on NewtekOne compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming NewtekOne's revenue will decrease by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 14.2% today to 23.9% in 3 years time.
• The bullish analysts expect earnings to reach $75.5 million (and earnings per share of $2.97) by about August 2028, up from $51.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from 6.1x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

NewtekOne Future Earnings Per Share Growth

Risks

• Accelerating fintech innovation and automation across lending could erode NewtekOne's competitive advantage and compress margins over time, as larger banks and tech-savvy competitors enter small business finance and drive down lending yields, ultimately impacting top-line revenue and net margins.
  
• The company's heavy concentration in small business lending, combined with exposure to economic downturns or spikes in commercial defaults, could materially increase credit losses and squeeze net income, especially since much of its loan book (such as ALP and SBA 7(a) loans) targets riskier borrower segments.
  
• Growing regulatory complexity and shifting oversight in the U.S. financial sector, including recent SBA rule changes that lower gain-on-sale margins and may affect volumes, could raise compliance costs and restrict revenue streams for non-bank-focused financial institutions like NewtekOne, weighing on longer-term earnings growth.
  
• Operational risks linked to integrating new banking activities-following its transition to a bank holding company and active use of digital, branchless models-increase the potential for elevated expenses, cyber vulnerabilities, and operational inefficiencies, which may drag down profitability and efficiency ratios if not managed tightly.
  
• Secular upward pressure on funding costs from rising interest rates and the likelihood that traditional noninterest-bearing deposits will disappear, combined with heavier competition for insured business deposits, could drive up NewtekOne's cost of funds and compress its net interest margins in future years, reducing returns on equity and overall profitability.

Valuation

• The assumed bullish price target for NewtekOne is $18.3, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NewtekOne's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.3, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $316.3 million, earnings will come to $75.5 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $12.06, the bullish analyst price target of $18.3 is 34.1% 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.