SVB's Calculated Moves Signal Strong Growth Amid Financial Industry Challenges

Key Takeaways

• Expansion in SVB Commercial segment and focus on high-quality loans indicate potential for greater net interest income and fund banking success.
  
• Proactive interest rate risk management and emphasis on growing quality loans aim to enhance net interest margins and overall earnings stability.
  
• Anticipation of interest rate reductions, elevated portfolio stress, and high competition could compress margins and negatively affect profitability and revenue growth.

Catalysts

Operates as the holding company for First-Citizens Bank & Trust Company that provides retail and commercial banking services to individuals, businesses, and professionals.

• The approved share repurchase plan of up to $3.5 billion signals a strong capital position and shareholder value focus, potentially driving earnings per share (EPS) growth through reduced share count.
  
• Positive loan trends, particularly in business and commercial loans as well as strong growth in SBA/SVB private and wealth channels, indicate robust revenue generation capabilities and a diversified loan portfolio likely supporting future interest and non-interest income.
  
• Expansion in the SVB Commercial segment, especially in high-quality loans in global funds banking or capital call lending business, suggests potential for increased net interest income from higher loan utilization and success in fund banking business.
  
• Proactive strategies to manage interest rate risk and the mix of deposits to mitigate margin compression, coupled with emphasis on growing quality loans and improving noninterest income, could stabilize and enhance net interest margins and earnings.
  
• Efforts to deepen relationships with existing customers and effectively integrate SVB acquired customers highlight potential for deposit growth and increased fee-based income, supporting revenue diversification and strengthening the bank’s overall financial health.

Assumptions

• Analysts are assuming First Citizens BancShares's revenue will decrease by -0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.0% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $228.25) by about August 2027, down from $2.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, up from 10.6x today. This future PE is greater than the current PE for the US Banks industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Risks

• The anticipation of interest rate reductions could lead to margin compression, negatively affecting the company's net interest margin and overall profitability.
  
• Elevated portfolio stress, particularly in equipment finance, although expected to decline, suggests a potential for increased provision for credit losses which would reduce net income.
  
• High competition and pricing pressure in the deposit market, especially within the online direct bank segment, may erode deposit margins and adversely impact the cost of funds.
  
• Exposure to market dynamics affecting commercial real estate, particularly if higher for longer interest rates persist, could lead to increased credit losses and impairments on loans secured by commercial properties.
  
• The uncertain future of the innovation economy, and its impact on client acquisition and deposit growth within the SVB Commercial segment, poses a risk to revenue growth and profitability targets.

Valuation

• The analysts have a consensus price target of $2325.83 for First Citizens BancShares 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 $2750.0, and the most bearish reporting a price target of just $2150.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.3 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $1920.86, the analyst's price target of $2325.83 is 17.4% 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.