EBC - Eastern Bankshares: Earnings To Continue Full Steam Ahead But Stock Appears Fairly Valued

Summary

• The top line will continue to grow strongly as strong job markets will support loan growth and rising interest rates will boost the margin.
• High inflation is likely to boost provision expenses. Further, the inflation outlook will likely keep provisioning at a normal level.
• The December 2023 target price suggests a small upside from the current market price. Further, EBC is offering a low dividend yield.

Continued loan growth and margin expansion will likely lift the earnings of Eastern Bankshares, Inc. ( EBC ) through the end of 2023. On the other hand, high inflation will lift non-interest expenses, thereby restraining earnings growth. Overall, I'm expecting Eastern Bankshares to report earnings of $1.33 per share for 2022 (up 48% year-over-year) and $1.57 per share for 2023 (up 18% year-over-year). Compared to my last report on Eastern Bankshares, I've reduced my earnings estimates mostly because I've raised my non-interest expense estimates. Next year’s target price is quite close to the current market price. Therefore, I'm maintaining a hold rating on Eastern Bankshares.

Loan Growth to Slow Down but Remain Satisfactory

Eastern Bankshares’ loan portfolio grew by a remarkable 4.1% in the third quarter of 2022, or 16.3% annualized. The management expects loan growth to slow down in the fourth quarter from the third quarter’s level, but remain above the long-term guidance level of mid-to-high-single digits, as mentioned in the earnings presentation . For 2023, the management expects loan growth to be below the 2022 level and at the lower end of the long-term guidance of mid-to-high-single digits.

In my opinion, the high interest-rate environment is bound to dampen credit demand in the coming quarters. Residential mortgage loans, which make up around 16% of total loans, are likely to be hit the most.

On the other hand, commercial loans, which make up almost three-quarters of total loans, will benefit from satisfactory economic activity. Eastern Bankshares operates in Massachusetts, New Hampshire, and Rhode Island. All three states currently have stronger job markets than most other states. As shown in the following chart, the unemployment rates of these states are near record lows, which indicates strong economic activity.

Considering these factors, I'm expecting the loan portfolio to grow by 1.0% in the last quarter of 2022, leading to full-year loan growth of 5.9%. For 2023, I'm expecting the loan portfolio to grow by 4.1%. Meanwhile, I'm expecting other balance sheet items to grow somewhat in line with loans. However, the equity book value will suffer due to unrealized mark-to-market losses on the Available-for-Sale securities portfolio. 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 and $1.60 per share for 2023. I've slightly reduced my estimates for both years mostly because I've increased my non-interest expense 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.

Maintaining a Hold Rating

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 26% for 2023, which appears sustainable. 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 my investment thesis.

I’m using the peer average price-to-book (“P/B”) and price-to-earnings (“P/E”) multiples to value Eastern Bankshares.

Multiplying the average P/E multiple with the forecast earnings per share of $1.57 gives a target price of $20.6 for the end of 2023. This price target implies a 6.0% upside from the October 28 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 $20.3 , which implies a 4.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 6.9%. Hence, I’m maintaining a hold rating on Eastern Bankshares.

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