BY - Byline Bancorp: A Leading Lender To Small Businesses

Summary

• As one of the top lenders to small businesses, BY is a great opportunity in the regional banking sector.
• This bank has posted impressive revenue growth of 18.47% for the past five fiscal years.
• Byline Bancorp's technical position is strong.
• I rate this stock a buy based on a combination of strong fundamentals and an encouraging technical position.

Regional banks are commercial banks with assets under management that range from $50 billion to $500 billion. This definition makes them immensely smaller than national, name-brand banks in terms of their operations. According to IBIS World , this industry's market size stands at a soaring $268 billion with a total of 19,744 active businesses in the U.S. Some major players are U.S. Bancorp (USB), TD Bank (TD), The PNC Financial Services Group (PNC), and Truist Financial Corporation (TFC).

The median value of net income margin for this sector is 27.31%, 7.93% less as compared to 29.48% of Byline Bancorp (BY) - meaning the bank has outperformed its sector. The P/E multiple for the regional banking sector stands at 11.24, and forward P/E stands at 10.47. Revenue is growing at 4.61%, which is further projected to go up to 7.3% in future revenue YoY estimates. The growing revenue streams for the sector make for a strong catalyst, and are a key part of my argument for investing in BY.

About Byline

Byline Bancorp operates through its subsidiary Byline Bank and its subsidiaries. Headquartered in Chicago, BY has sales operations in multiple locations across several states, including Illinois, Florida, Michigan, New Jersey, and New York. Various types of services - such as wealth management, commercial banking, and even small ticket equipment leasing solutions - are offered to small and medium-sized businesses, commercial real estate, and financial sponsors. Byline is a leading lender in small business administration loans, ranked fifth in the nation and first in Illinois and South Dakota.

Financial Performance

The strong growth dynamics of the sector are reflected in BY's revenue growth YoY, which has been increasing at 18.47% over the past five fiscal years. Forward YoY revenue growth of 11.1% is outperforming the sector median of 7.3% by 52.6%. Forward growth is projected to outperform the sector due to an increased interest rate environment, which will empower the bank's interest rate earnings.

While peers from the same sector struggled to generate a growing cash flow from operating activities, BY produced a staggering $213.95 million in cash from its operations for the past reported fiscal year. This shows the strength of BY's operations and creates for investors a feeling of trust in its business model.

One possible upgrade might be the ROA (return on assets) - at 1.19%, it beats the sector median of 1.17% by 1.84%. But the financial performance of the company could potentially be improved by increasing its assets. Banks earn interest on their assets, which is a significant contributor to revenue growth, and it also demonstrates the bank's ability to convert investments into earnings. Increasing assets could also make the bank more attractive to potential investors.

Strengths

Byline Bancorp's emphasis on relationship banking, which entails creating enduring ties with its clients, is one of its main advantages. The bank has a significant presence in the Midwest region of the United States and offers a variety of business and retail banking services, such as loans, deposit accounts, cash management, and internet banking. $130 million in community development loans were sanctioned in FY 2021, maintaining its top SBA lender position for Illinois and Wisconsin for an eighth consecutive year.

In recent trading sessions, the 50-day SMA crossed the 200-day SMA, which indicates a strong bullish signal for BY. This is a positive sign for traders and analysts as it hints at a potential trend reversal from bearish to bullish. While the stock price ran up recently, BY still trades at about the same price it did 18 months ago.

Apart from this technical indicator, the stock has rallied 8.9% for past four weeks because of revised positive EPS estimates of 2.57 and 2.62 for fiscal years 2023 and 2024, respectively. That's a 9.7% increase from current reported EPS of 2.32 for 2023 and 12.9% for 2024. BY has received six upward revisions for its FQ1 EPS, the highest number among its peers. This is significant because upward revisions to EPS are closely watched by traders and investors as they can indicate a potential upward trend in the stock market. As a result, this helps BY to stand out in the market and potentially attract more investors.

Weakness

Being a bank, BY faces its biggest risk in terms of credit and loan defaults by its customers. As a leading lender to small business administrations, BY is exposed to potential risk of default if businesses fail or are impacted by volatile economic and market conditions like a recession. Taking into consideration a recession and the Federal Reserve's quantitative tightening, banks are exposed to net interest margin fluctuations due to changes in interest rates. This could be devastating for the bank if it's not positioned efficiently by risk managers, as the fixed-income market is highly volatile during Fed's quantitative tightening.

Forward Outlook

For the year ended Dec. 31, 2021, Byline reported a consolidated net income of $92.8 million, up from a net income of $37.5 million for the year ended Dec. 31, 2020 - a $55.3 million increase. This was a result of an increase in net interest income of $21.4 million, a decline in the provision for loan and lease losses of $54.5 million, as well as an increase in non-interest revenue of $12.2 million.

The rise in average interest-earning assets during the year ended Dec. 31, 2021, was the main cause of the increase in net interest revenue. Due to economic recovery in 2021, declines in general reserves and qualitative considerations were the main cause of the reduction in the provision for loan and lease losses. Gains on the sale of loans have been one of the main factors driving the increase in non-interest revenue as a result of the Federal Reserve increasing interest rates and creating more potential to earn.

A valuation of the stock price done on the basis of a P/E multiple of 12.5 and an EV/EBITDA multiple of 11.7 projects a fair value of $29.27, compared to $25.04 (the closing price on Feb. 15, 2023). Based on valuation, the stock is undervalued with a strongly growing industry potential.

Conclusion

In a rising interest rate environment, BY is susceptible to profit from lending and various account-related fees. As the amount charged to its customers increases with rising interest rates , BY has the potential to earn at a higher margin than usual. The company has strong industry support, and its technical aspects are also encouraging. As noted earlier, the 50-day moving average has crossed the 200-day moving average and the stock has moved sharply higher over the past four weeks, suggesting that investors are placing bets on the company's impressive earnings revision. To take advantage of its sector-driven and profit growth opportunities, I assign a buy rating on Byline Bancorp.

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