BANF - BancFirst Corporation: Margin Outlook Remains Bright However Stock Appears Costly

Summary

• The margin will likely continue to grow this year due to the deployment of excess cash as well as the rise in market interest rates.
• Loan growth will likely be below average due to economic headwinds.
• Provisioning will likely also be below average. BANF currently appears to have an excessively high reserve for loan losses.
• The December 2023 target price suggests a small downside from the current market price. Further, BANF is offering a low and unattractive dividend yield.

Earnings of BancFirst Corporation (NASDAQ: BANF ) will most probably increase this year on the back of an asset mix improvement and higher interest rates, both of which will boost the margin. Further, subdued loan growth and below-average provisioning will support earnings. Overall, I'm expecting BancFirst to report earnings of $6.01 per share for 2023, up 4% year-over-year. The year-end target price suggests a small downside from the current market price. Therefore, I’m adopting a hold rating on BancFirst Corporation.

Excess Cash Presents an Opportunity for Further Topline Growth

BancFirst Corporation’s net interest margin grew by an impressive 35 basis points during the fourth quarter, as compared to 43 basis points in the third quarter and 27 basis points in the second quarter of the year. The margin growth is likely to decelerate in 2023 as the up-rate cycle is nearing its end. The balance sheet is slightly asset sensitive. According to details given in the 10-K filing , around $6.2 billion worth of interest-sensitive assets and $5.9 billion worth of interest-sensitive liabilities will mature in 2023. This asset-liability gap is around 5% of total assets, which isn't too bad. The margin is likely to be moderately rate-sensitive due to this gap.

Unlike most other banks, BancFirst still has a large amount of excess cash on its books. While the cash is currently dragging the margin, it is also providing an opportunity to improve the asset mix in the future and thus raise the margin. The following table shows the trend of interest-bearing deposits with other banks, which is a cash component.

There's currently a large difference between the rates earned on cash and loans (see below). Therefore, even a small deployment of cash can have a magnified impact on the margin.

Provisioning is Likely to Remain Subdued

BancFirst Corporation maintains an excessively high reserve for expected loan losses. The allowance to non-accrual loan ratio was a whopping 606.1% at the end of December 2022. As a result, I'm confident that the company will easily ride out any recessionary period without a significant jump in provisioning expenses. Further, I'm expecting provisioning to be below the historical average because I'm expecting loan additions to be below average as well (as discussed above). Overall, I'm expecting the net provision expense to make up 0.17% of total loans in 2023, which is below the last five-year average of 0.24%.

Expecting Earnings to Grow by 4%

As discussed above, the anticipated margin expansion, loan growth, and below-average provisioning will likely support earnings this year. Overall, I'm expecting BancFirst to report earnings of $6.01 per share for 2023, up 4% year-over-year. The following table shows my income statement estimates.

Multiplying the average P/TB multiple with the forecast tangible book value per share of $36.30 gives a target price of $82.30 for the end of 2023. This price target implies a 9.2% downside from the February 27 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiplying the average P/E multiple with the forecast earnings per share of $6.01 gives a target price of $86.90 for the end of 2023. This price target implies a 4.0% downside from the February 27 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $84.60 , which implies a 6.6% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 4.8%. Hence, I’m adopting a hold rating on BancFirst Corporation.

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