Digital Lending Expansion Will Deliver Long-Term Value

Key Takeaways

• Digital, integrated platform and advanced analytics drive operating efficiency, customer retention, and superior credit risk management for sustainable earnings growth.
  
• Favorable regulatory trends and SME banking shifts provide tailwinds for market share expansion, revenue diversification, and ongoing profitability improvements.
  
• Heavy reliance on government-guaranteed lending, rising competition, and evolving macro risks threaten NewtekOne's margins, revenue growth, and long-term earnings stability.

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.

• NewtekOne is capitalizing on the expanding pool of small and independent business owners in the U.S., growing its addressable market for lending and financial products-which should support sustained loan origination growth and revenue expansion.
  
• The company's fully digital, branchless online platform and integrated solutions (banking, payments, payroll, lending) increase operating leverage and customer stickiness, driving efficiency ratios down and improving net margins over time.
  
• Active use of advanced technology and proprietary analytics in underwriting and servicing enables superior credit risk management and cost-effective customer acquisition, supporting stable asset quality and bolstering long-term earnings growth.
  
• Regulatory and technological tailwinds (such as support for small business lending and the shift of SMEs away from traditional banks toward specialized, tech-driven lenders like NewtekOne) favor continued market share gains and revenue diversity.
  
• Recent improvements in business deposit growth and lower funding costs through integrated offerings are boosting net interest margins and earnings stability, positioning the company for further profitability improvements.

NewtekOne Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NewtekOne's revenue will decrease by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 28.3% in 3 years time.
• Analysts expect earnings to reach $82.8 million (and earnings per share of $2.73) by about June 2029, up from $61.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.8x on those 2029 earnings, up from 6.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Risks

• Heavy reliance on SBA 7(a) and government-guaranteed loans exposes NewtekOne to regulatory or legislative changes that could reduce favorable gain-on-sale margins or origination volumes; recent SBA rule changes already caused the company to lower expected gain-on-sale, directly impacting future revenues and earnings stability.
  
• While NewtekOne touts its digital and technology-first platform, it remains less well-known and may lack the digital scale and brand recognition of larger fintechs or traditional banks, threatening long-term customer acquisition and retention-critical for sustaining loan production and revenue growth.
  
• The rapid expansion of big tech-led, embedded financial services and broader fintech adoption could erode NewtekOne's market share among SMBs, leading to heightened competition, compressed fee/margin structures, and potentially weaker net interest income and net margins over time.
  
• Aggressive growth in complex alternative loan securitizations introduces risk of mispricing or underestimating future credit losses, especially if SMB credit conditions deteriorate or prepayment speeds change, potentially resulting in higher charge-offs and lower net earnings, despite historical charge-off rates currently being low.
  
• Sustained inflation and elevated interest rates could ultimately increase SMB borrowing costs and soften loan demand, while simultaneously pressuring deposit costs (as seen by the need to offer higher-yield accounts); together these trends may squeeze net interest margin and overall earnings power in coming years.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $16.8 for NewtekOne 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 $25.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $292.6 million, earnings will come to $82.8 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $13.92, the analyst price target of $16.8 is 17.1% 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.