FNB - F.N.B. Corporation: Solid Asset Base Brings A Buy Case

2023-08-24 03:57:51 ET

Summary

• F.N.B. Corporation has proven its capacity to grow quickly and deliver a sound return to shareholders, with a current yield of over 4% and a low P/E ratio.
• The company operates in the regional bank sector and has three segments: Community Banking, Wealth Management, and Insurance.
• Despite a decrease in share price, F.N.B. had a solid last quarter with 31% YoY growth in bottom line and 12% YoY growth in loans.

Introduction

I think that the worst had passed for a lot of regional banks and scooping them up when sentiment was at its worst was the right move in hindsight. But it's always easy to be right when looking back, so the question arises whether or not F.N.B. Corporation ( FNB ) remains to be an appealing buy for investors or not. In my opinion, the company has proven very well its capacity to grow quickly and deliver a sound return to shareholders over the long term. The yield for example is at over 4% currently and that is looking very good given the p/e is under 8 and the recent few months have offered some share price volatility.

I like the quality and fundamentals of the business and will be rating it a buy as a result. Total loans have been increasing whilst interest rates are elevated and this in years should help support a growing ROE for FNB, resulting in more dividend increases too.

Company Structure

FNB is operating in the regional bank sector, a market that has seen a lot of turmoil and volatility this year as some of the largest players started to see bank runs in earlier parts of the year, causing a ripple effect. The share price for FNB quickly decreased and it hasn't yet managed to recover to the highs of 2023 back in February. The decrease seems unwarranted as the asset base of FNB remains intact and solid. Looking at how the company is built up though we can see it has three various segments currently, those being Community Banking, Wealth Management and lastly Insurance. The first segment primarily focuses on offering commercial banking solutions covering both corporate and small business customers and clients. Besides that, the segment also has operations around real estate financing and other related products and services.

The second segment though provides both personal and corporate fiduciary services that are comprised of administration and trust estates. Lastly, the insurance segment does as the name suggests provide both customers and clients with commercial and personal insurance but also reinsurance products.

The company had in my opinion a very solid last quarter where growth was plenty and the bottom line showed clear signs of life as it grew by 31% YoY, aiding largely by growing interest rates among other factors. For me, the highlight was a solid 12% YoY growth of loans for the company. This helped them achieve the EPS they did. But since the release of earnings back in July the share price sits lower, despite what I outlined as a very good performance. This of course leaves us with the solid investment opportunity that I see currently.

Earnings Transcript

From the last earnings call, there are some comments that I think are worthwhile to highlight. The CEO of FNB Vince Delie had the following to say:

“Over the past several years, we've enhanced our product suite and digital capabilities, grown our exceptional team of bankers, and strategically expanded our market presence to offer best-in-class experiences for our customers that build convenience, trust, and a stable deposit mix. For example, we recently launched the Common App, Common Account application, in our award-winning eStore, where we intend to be the first bank to offer a single universal application for the majority of our products and services, enabling customers with the ability to apply for multiple products simultaneously”.

The priority of finding new ways to serve customers has paid off as loans and deposits grew for the company. This leaves a lot of optimism for investors and the potential ROI continues to remain appealing. Going into the next quarter though, I think it's wise to continue looking at some of the factors that made Q2 solid, like loans and deposits, but also ROE growth. The delinquencies have increased on a YoY basis and right now sit at 0.75% which I wouldn't constitute to be too high, but having at where it was in Q2 FY2022 is preferable of course, back it used to be 0.58% instead.

Company Qualities

The balance sheet for the company remains in a solid position I think as the cash position is at over $1.7 billion. Perhaps down from $3.4 billion in 2021, but the company has solid margins which help offset some of this. Besides, the company has continued to buy back shares and raise the dividend in the same period. For the TTM the dividend paid has amounted to $172 million in total, up from $156 million in 2021. Despite the increase, the payout ratio remains very sustainable at under 30% currently. If FNB wanted I think they could increase it to somewhere around 35% instead, and given the ROE being over 10% I don't think it would derail the financial state in any way.

Valuation wise the company looks very appealing on an earnings basis with a multiple 14% below the sector and with a p/b below 1 I don't think you have to overpay for the company right now by any means. In fact, I think the discounts provide a decent immediate upside potential that makes it worthwhile to buy.

Risk Associated

The competitive landscape in the Southeast U.S. poses an ongoing risk to the company's prospects. Given the attractiveness of this region, numerous players are vying for market share, intensifying competition across the board.

Looking ahead, a pivotal factor influencing market sentiment and the trajectory of these shares is the Federal Reserve's stance on rate hikes. A definitive signal from the Fed about the conclusion of rate hikes or even a widely shared anticipation of such an event holds the potential to trigger a significant shift in investor sentiment. Until such clarity emerges, there remains a looming risk that these shares might continue to experience a gradual drift, potentially subject to market uncertainty and sentiment fluctuations.

It's important for investors to closely monitor both the competitive landscape and the broader economic indicators to make informed decisions regarding their investment strategy in the Southeast U.S. market. Seeing the loans and deposits still increase though on a YoY basis is very reassuring and speaks volumes about the market position that FNB currently has and its ability to drive growth at difficult times still. With an efficiency ratio of 50%, the company's fundamentals are further highlighted and the risks are trumped.

Investor Takeaway

One of the factors with FNB is the reliable dividend yield it has. It hasn't grown in the last 10 years, which should be viewed as a negative, but it has also not deleveraged the company in any way and they remain in a solid position to leverage their assets into more growth.

I think the higher interest rates and clear growth trajectory the loans are on will be major support for share price appreciation in the coming years. This concludes me having a very positive view of the business and issuing a buy for it right now.

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