Dynamic Digital Strategies And Expansions Set To Propel Bank's Growth And Customer Loyalty

Key Takeaways

• Strategic enhancements in digital platforms and targeted marketing are set to attract new customers, boosting revenue through growth in customer base and deposits.
  
• Expansion into new loan verticals and investment in commercial teams will increase loan growth, enhancing net interest income by diversifying the earning asset base.
  
• Strategies to drive growth through hiring commercial RMs and focusing on relationship-based loans carry execution risks, potentially affecting profitability and loan quality.

Catalysts

A bank holding company, provides various banking and nonbanking products to individuals and businesses in Wisconsin, Illinois, and Minnesota.

• Enhanced digital platforms and services, along with targeted marketing strategies, are expected to attract new customers and improve customer retention, impacting revenue positively through increased customer base and deposit growth.
  
• Introducing new loan verticals and expanding commercial teams are likely to bolster loan growth, directly contributing to an improvement in net interest income by diversifying and growing the earning asset base.
  
• Significant investments in customer service and satisfaction, evidenced by high Net Promoter Scores and industry accolades, should foster a loyal customer base and higher quality accounts. This, in turn, is expected to impact revenue through increased cross-selling opportunities and reduced cost of customer acquisition.
  
• Strategic reallocation of the investment portfolio and disciplined expense management are projected to enhance the bank's return profile and net margins through improved efficiency and profitability.
  
• Commitment to credit quality and proactive credit management, particularly in the CRE portfolio, aims to minimize loan losses and maintain asset quality, protecting earnings and capital ratios in the longer term.

Assumptions

• Analysts are assuming Associated Banc-Corp's revenue will grow by 25.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.7% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $637.4 million (and earnings per share of $4.08) by about September 2027, up from $176.7 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 6.7x on those 2027 earnings, down from 18.8x today. This future PE is lower than the current PE for the US Banks industry at 11.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Risks

• The reliance on hiring additional commercial relationship managers (RMs) to drive loan and deposit growth might face recruitment and execution challenges or fail to meet performance expectations, negatively impacting both loan and revenue growth.
  
• An increase in competitive pressures, especially in the consumer and auto loan markets, could lead to slower loan growth or require more favorable loan terms for borrowers, thereby reducing net interest margins and overall profitability.
  
• Any significant economic downturn or persistently elevated interest rates may reduce demand for loans and affect borrowers' ability to repay, leading to higher loan delinquencies and charge-offs, which would directly impact net margins and earnings.
  
• The bank’s strategy to decrease reliance on lower-yielding, non-relationship balances, while focusing on quality relationship-focused loan growth, carries execution risk. If the strategic shift does not yield the expected profitability improvements or faces delays, it could negatively impact net interest income and earnings.
  
• Plans to grow core customer deposits to fund loan growth may not materialize as expected due to competition or changing market conditions. An inability to grow deposits as planned could lead to increased reliance on wholesale funding, elevating funding costs and squeezing net interest margins.

Valuation

• The analysts have a consensus price target of $23.9 for Associated Banc-Corp 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 $27.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $637.4 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $22.42, the analyst's price target of $23.9 is 6.2% 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.