Calculated Shifts And Focused Growth Outlook Brighten Bank's Financial Horizon

Key Takeaways

• Focused approach on improving net interest margin and deposit mix enhances profitability and margin sustainability without detailing financial specifics.
  
• Strategic shifts, including the sale of FinTrust and aggressive market footprint expansion, aim to streamline operations and diversify revenue sources.
  
• Strategic shifts and management decisions may impact United Community Banks' revenue, loan growth, and profitability amidst increasing competitive and credit pressures.

Catalysts

Operates as the financial holding company for United Community Bank that provides financial products and services to commercial, retail, government, education, energy, health care, and real estate sectors.

• A disciplined approach to deposit pricing and loan repricing is leading to an expanded net interest margin, which should continue to positively impact net interest revenue.
  
• Reduction in non-performing assets and a cautious approach to new credits amidst uncertain market conditions suggest a strong focus on maintaining credit quality, potentially leading to lower loan loss provisions and improved net income.
  
• The conscious strategy to allow higher rate, unprofitable deposit balances to exit, particularly in public funds business, alongside a shift from noninterest-bearing to higher-rate products, indicates an emphasis on improving deposit mix and cost, which could enhance margin sustainability and profitability.
  
• The sale of the registered investment adviser (RIA), FinTrust, which aligns with a more focused strategy on bank-centric wealth management services, may not only be capital accretive but also streamlines operations, potentially improving operational efficiency and profitability.
  
• Hiring of new teams and the identification of new growth opportunities, especially in loan production, indicates an aggressive stance on expanding the bank's market footprint and product offerings, which should contribute to revenue growth and diversification, impacting overall financial performance positively.

Assumptions

• Analysts are assuming United Community Banks's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.3% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $357.9 million (and earnings per share of $2.59) by about September 2027, up from $184.8 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 12.8x on those 2027 earnings, down from 19.7x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.29% 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

• A cautious stance on new loan originations and moving downgraded loans out of the bank might slow loan growth, impacting future revenue and interest income.
  
• The decision to sell the registered investment adviser, FinTrust, due to its high capital requirement and the strategic shift to focus on private bank, trust, and retail businesses could disrupt revenue streams and affect service diversity, potentially impacting fee income stability.
  
• A decrease in total deposit balances due to strategic rate adjustments and a shift towards higher-rate products may pressure the bank’s net interest margin, affecting net interest income.
  
• An increase in nonperforming assets and attention to credit quality, including potential downgrades in commercial real estate, might elevate credit losses, affecting net income.
  
• Ongoing competitive pressure on deposit and loan pricing, especially with significant CDs maturing and potentially rising costs of funds, could squeeze margins further, impacting profitability.

Valuation

• The analysts have a consensus price target of $32.18 for United Community Banks 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 $1.3 billion, earnings will come to $357.9 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $30.47, the analyst's price target of $32.18 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.