EBC - Eastern Bankshares: Sell And Move On

Summary

• We have covered a lot of regional banks and were asked about Eastern Bankshares stock.
• The most recent Eastern Bankshares' earnings were mixed at best, but there are troubling trends ahead of a mild recession.
• So many other banks are setting up for strength this year, while asset quality metrics are declining here, while efficiency is evaporating.
• Eastern Bankshares is not worth the small dividend yield.

We have begun our earnings season coverage of the many regional bank companies that we follow. This week we come into the biggest week of earnings, and we expect this recent big rally to fizzle. Thus, we think you should be taking profits.

One stock we were asked about is actually sitting at yearly lows, following its just-reported earnings . The stock of Eastern Bankshares, Inc. ( EBC ) is the stock in question, and we think that there are just so many better bank stocks to invest in. The yield here does not justify the risk, Eastern Bankshares is facing margin pressure, and asset quality is mixed.

Eastern Bankshares, Inc.'s Q4 sees mixed headline results

The top line was down from last year for Eastern Bankshares. The Q4 revenues were $194.5 million, dipping 0.6% from the sequential Q3, but increased 13% from a year ago. That said, there was both loan and deposit growth. Revenues were up, but margins were weaker than expected. There was also some pressure on non-interest income, led to a very slight bottom line miss. Net income was down from last quarter at $42.3 million, or $0.26 per share, missing consensus. This was a sizable decline from Q3, which saw $54.8 million in net income, while EPS was $0.33.

We think 2023 will be strong for banks based on the trends we are seeing for financials, especially in this rising rate environment. But margins fell here. Net interest margin was 2.81%, down big from 2.87% in Q3. The margin fell because higher yields on loans could not offset the pain from rising costs of funds. This weighed on net interest income, offsetting increases in non-interest income from a year ago, but noninterest income fell from Q3. Pretty mixed at best.

Loans and deposit trends at Eastern Bankshares

New loans are being issued at higher rates, and that helps the yield on loans, which is great for the bank. For most banks, we are seeing rising margins which are excellent for earnings potential, though banks are starting to pay more on deposits as the environment for attracting customer deposits has gotten much tighter and more competitive. Eastern Bankshares fell into this pain.

Eastern Bankshares' loans continue to grow and, unlike so many banks we have covered, are actually seeing more deposits. Net loans totaled $13.6 billion at the end of the quarter, rising $0.6 billion from the end of Q3 2022's $12.9 billion. We expect further and strong production of loans in 2023, despite the risk of a mild recession brewing, but we will continue to monitor the impact of the recession, should it land. Total deposits were up to $19.0 billion, up from $1.87 billion to start the quarter. However, the rates paid on those deposits increased from a year ago.

Eastern Bankshares' asset quality

We will say that Eastern Bankshares, Inc. continues to have very healthy assets, and they were mixed in Q4 2022. Banks in general are preparing for a mild recession. With such preparations, banks are anticipating that there will be more and more charge-offs and late payments, etc. The provisions for loan losses were higher, much like other banks in Q4 as the bank prepares for borrowers potentially facing issues with paying back their loans.

So in Q4, Eastern Bankshares upped its provision for credit losses to $10.9 million, up from a credit in Q4 2021. The allowance for credit losses was up to $142.2 million, or 1.05% of total loans compared to 1.02% to start the quarter. Net charge-offs were flat from Q3 at 0.01% of loans.

The bank also saw a drastic move in its efficiency ratio as well, at 68.25%, a far cry from 59.75% in Q3.

The weakening efficiency, higher cost of funding, and ballooning expenses all combined to see severe weakening in the return on average assets to 0.75% from 0.97%in Q3. The return on equity also dipped heavily from 7.83% to 6.93%.

One improvement from Q3 was valuation. The bank's stock is becoming more attractive relative to book value on this decline. At $15.78, Eastern Bankshares stock is really getting closer to the book value per share at December 31, 2022. Book value per share was $14.03 at the end of the quarter which was up from Q3, but folks book value is way down from over $16 earlier in 2022. Ouch. Tangible book is also down over 20% in 2022, at $10.28.

Take-home

Eastern Bankshares, Inc.'s stock is pulling back heavily this year. There is a small dividend yield, there are margin issues, and declining asset quality metrics. We do not want to own Eastern Bankshares, Inc. stock into a recession, especially when there are so many more quality regional banks out there.

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