EBC - Eastern Bankshares: Earnings To Continue Full Steam Ahead But Stock Is Pricey

• Strong regional job markets will likely play a pivotal role in keeping loan growth robust through the end of 2023.
• Thanks to the loan mix, the margin is quite sensitive to interest rate changes.
• Higher interest rates will likely continue to erode the book value per share, which will hurt the equity valuation.
• The December 2022 target price suggests a small downside from the current marketplace. Further, EBC is offering a low dividend yield.

Earnings of Eastern Bankshares, Inc. ( EBC ) will likely continue to surge through the end of 2023 mostly on the back of decent loan growth. Further, the margin will react positively to a rising rate environment, which will lift earnings. On the other hand, higher provisioning expenses will restrict the bottom-line growth. Overall, I'm expecting Eastern Bankshares to report earnings of $1.39 per share for 2022, up 54% year-over-year. Compared to my last report on the company, I've revised upwards my earnings estimate because I've tweaked upwards my net interest income estimate. For 2023, I'm expecting earnings to grow by a further 16% to $1.60 per share. The year-end target price is quite close to the current market price. Therefore, I'm maintaining a hold rating on Eastern Bankshares.

Loan Growth To Decelerate

After the first quarter's disappointing performance, the loan book grew by an impressive 1.8% in the second quarter of 2022. I’m expecting loan growth to slow down in the second half of this year because of heightened interest rates.

On the other hand, strong job markets will likely support loan growth in the quarters ahead. Eastern Bankshares operates in Massachusetts, Rhode Island, and New Hampshire. Both Rhode Island and New Hampshire have unemployment rates that are lower than the national average. Further, all three states have very strong job markets from a historical perspective.

The management also appeared optimistic about loan growth during the latest conference call . The management expects commercial loan growth to be in the mid-to-high-single digit range. Considering these factors, I'm expecting the loan book to grow by 3.0% in the second half of 2022, leading to full-year loan growth of 3.8% from the end of December 2021 to the end of 2022. However, the average loan balance for 2022 would be much higher than 2021 because of the acquisition of Century Bancorp in November 2021.

In my last report on Eastern Bankshares, I estimated loan growth of 2.0% for 2022. I've revised upwards my loan growth estimate mostly because of the second quarter’s surprising performance.

Higher Rates To Erode Equity Book Value

The growth of other balance sheet items will most probably lag loan growth this year. Due to a large balance of available-for-sale debt securities, the equity book value stands to take a hit from the rising-rate environment. An increase in interest rates will lower the value of the investment securities portfolio. This loss will flow directly into equity bypassing the income statement.

The book value per share has already declined from $18.28 at the end of December 2021 to $15.17 at the end of June 2022. The book value per share will likely dip even further because I'm expecting the Federal Reserve to hike the fed funds rate by another 75 basis points this year before reducing rates in mid-2023.

The following table shows my balance sheet estimates.

In my last report on Eastern Bankshares, I estimated earnings of $1.39 per share for 2022. I've revised upwards my earnings estimate because I've tweaked upwards both my loan and margin estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Current Market Price Near The Year-End Target Price

Eastern Bankshares is offering a dividend yield of 2.1% at the current quarterly dividend rate of $0.10 per share. The earnings and dividend estimates suggest a payout ratio of 25% for 2022, which is a sustainable level. As the IPO of Eastern Bankshares was completed in 2020, there isn’t enough data to determine what is a comfortable payout rate for the management. Therefore, I haven’t incorporated any change in the dividend level for this investment thesis.

I’m using the peer average price-to-book (“P/B”) and price-to-earnings (“P/E”) multiples to value Eastern Bankshares. The following table shows the peer multiples obtained from Seeking Alpha .

Multiplying the average P/B multiple with the forecast book value per share of $15.1 gives a target price of $22.2 for the end of 2022. This price target implies a 14.2% upside from the August 10 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $18.7 , which implies a 3.7% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 1.7%. Hence, I’m maintaining a hold rating on Eastern Bankshares.

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