FFBC - First Financial Bancorp: Outlook For The Top Line Remains Bright
Summary
- I've revised upward the loan balance estimate following the third quarter’s performance, which beat my expectations.
- Margin growth will likely slow down as the deposit beta will move to a more normal level.
- The December 2023 target price suggests a moderate upside from the current market price. Further, FFBC is offering a decent dividend yield.
Earnings of First Financial Bancorp (FFBC) will most probably continue to surge next year on the back of moderate loan growth. Further, margin expansion will lift earnings. Overall, I'm expecting First Financial Bancorp to report earnings of $2.25 per share for 2022, up 5%, and $2.59 per share for 2023, up 15% year-over-year. Compared to my last report on the company, I've slightly increased my earnings estimates, mostly because I've revised my loan balance estimates following the third quarter's remarkable performance. Next year's target price suggests a moderate upside from the current market price. Based on the total expected return, I'm maintaining a buy rating of First Financial Bancorp.
Loan Growth Unlikely to Drop too Low
First Financial Bancorp's loan portfolio surged by 4% during the third quarter, which beat my expectations. On an annualized basis, this is the strongest loan growth since 2018. As it's unusually high, this growth cannot be sustained in future quarters. Further, high borrowing costs will discourage borrowers. The management also mentioned in the conference call that loan pipelines are moderating and that it expects loan growth to moderate to high-single digits over the fourth quarter.
On the other hand, strong job markets will keep loan growth from falling too low. First Financial Bancorp mostly operates in Ohio, Kentucky, Indiana, and Illinois. Unemployment rates in all four states have remained near record lows this year.
The management mentioned in the earnings presentation that it expects loan balances to grow in the high-single-digit range. Considering the factors mentioned above, I'm expecting loan growth to be below the management's guidance. I'm expecting the loan portfolio to grow by 1.25% in the last quarter of 2022, taking full-year loan growth to 7%. For 2023, I'm expecting the loan portfolio to grow by 5%. Compared to my last report on First Financial Bancorp, I haven't changed my loan growth estimates. However, my loan balance estimates are now much higher than before because of the third quarter's surprisingly good performance.
Meanwhile, I'm expecting deposits to grow somewhat in line with loans. The following table shows my balance sheet estimates.
Financial Position |
FY18 |
FY19 |
FY20 |
FY21 |
FY22E |
FY23E |
Net interest income |
449 |
484 |
457 |
452 |
504 |
605 |
Provision for loan losses |
15 |
30 |
71 |
(18) |
7 |
20 |
Non-interest income |
103 |
131 |
189 |
172 |
180 |
190 |
Non-interest expense |
324 |
342 |
391 |
401 |
437 |
475 |
Net income - Common Sh. |
173 |
198 |
156 |
205 |
213 |
246 |
EPS - Diluted ($) |
1.93 |
2.00 |
1.59 |
2.14 |
2.25 |
2.59 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
In my last report on First Financial Bancorp, I estimated earnings of $2.22 per share for 2022 and $2.52 per share for 2023. I've slightly increased my earnings estimates, mostly because I've raised my loan balance estimates following the third quarter's strong growth.
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
Moderately High Total Expected Return Justifies a Buy Rating
First Financial Bancorp is offering a dividend yield of 3.8% at the current quarterly dividend rate of $0.23 per share. The earnings and dividend estimates suggest a payout ratio of 35.5% for 2023, which is below the five-year average of 46%. Therefore, there is room for a dividend hike. Nevertheless, I'm not expecting any change in the dividend level because First Financial Bancorp does not increase its dividend regularly.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value First Financial Bancorp. The stock has traded at an average P/TB ratio of 1.93 in the past, as shown below.
FY17 |
FY18 |
FY19 |
FY20 |
FY21 |
Average |
TBVPS - Dec 2023 ($) |
9.5 |
9.5 |
9.5 |
9.5 |
9.5 |
Target Price ($) |
16.5 |
17.4 |
18.4 |
19.3 |
20.3 |
Market Price ($) |
24.2 |
24.2 |
24.2 |
24.2 |
24.2 |
Upside/(Downside) |
(32.1)% |
(28.1)% |
(24.2)% |
(20.3)% |
(16.4)% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 13.2x in the past, as shown below.
FY17 |
FY18 |
FY19 |
FY20 |
FY21 |
Average |
EPS 2023 ($) |
2.59 |
2.59 |
2.59 |
2.59 |
2.59 |
Target Price ($) |
28.9 |
31.5 |
34.1 |
36.7 |
39.3 |
Market Price ($) |
24.2 |
24.2 |
24.2 |
24.2 |
24.2 |
Upside/(Downside) |
19.4% |
30.1% |
40.8% |
51.5% |
62.2% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $26.2 , which implies an 8.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 12.1%. Hence, I'm maintaining a buy rating on First Financial Bancorp.
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First Financial Bancorp: Outlook For The Top Line Remains Bright