2023-04-27 21:08:59 ET
Summary
- I’ve decreased my earnings estimate because I’ve revised downwards both my loan growth and margin estimates. Nevertheless, I’m expecting earnings to grow this year.
- The risk level appears low because ASB has enough liquidity to completely cover uninsured deposits without feeling compelled to sell its securities at a loss.
- The December 2023 target price suggests a very high upside from the current market price. Further, ASB is offering a high dividend yield.
Earnings of Associated Banc-Corp ( ASB ) will most probably continue to grow this year on the back of loan growth. I’m expecting the company to report earnings of $2.63 per share for 2023, up 12% year-over-year. Compared to my last report on the company, I’ve slightly reduced my earnings estimate because I’ve revised downwards both my loan growth and margin estimates. The year-end target price suggests a very high upside from the current market price. Further, the risk level appears low compared to other banks. Therefore, I’m maintaining a buy rating on ASB stock.
Revising Down my Loan Growth Estimate
As expected, loan growth slowed down to 1.4% in the first quarter of 2023 from 3.5% in the fourth quarter of 2022. Loan growth will likely slow down even further in the second quarter because interest rates are now higher. Further, Associated Banc-Corp decided to terminate its third-party originated mortgage business during the first quarter. This too will weaken loan growth in the year ahead.
One factor that is still positive for loan growth is the strong job market. Associated Banc-Corp is well diversified geographically with loan production offices in Indiana, Michigan, Missouri, New York, Ohio, and Texas. Therefore, the national average is a good proxy for Associated Banc-Corp’s markets. The Federal Reserve projects the unemployment rate to rise in the country, but it will still remain low compared to the last decade.
U.S. Bureau of Labor Statistics for History, the Federal Reserve for Projections
The management has reduced its loan growth projection from 7%-9% to 6%-8% and core-customer deposit projection from 3%-5% to 1%-3%, as mentioned in the earnings presentation . Considering the factors mentioned above, especially the third-party business shutdown, I’m revising downwards my loan growth estimate to 5.2% from my previous estimate of 6.1%.
Further, I’m expecting deposits to grow in line with loans. I was pleased to see that the deposit run that plagued SVB Financial ( OTC:SIVBQ ) and First Republic Bank ( FRC ) in March didn’t seem to affect Associated Banc-Corp. In fact, ASB’s deposit growth outpaced loan growth in the first quarter. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 22,702 | 22,620 | 24,068 | 23,945 | 28,487 | 29,977 |
Growth of Net Loans | 10.6% | (0.4)% | 6.4% | (0.5)% | 19.0% | 5.2% |
Other Earning Assets | 7,638 | 6,077 | 5,577 | 7,576 | 7,228 | 8,416 |
Deposits | 24,897 | 23,779 | 26,482 | 28,466 | 29,636 | 31,484 |
Borrowings and Sub-Debt | 4,527 | 4,195 | 2,435 | 2,225 | 5,174 | 5,844 |
Common equity | 3,524 | 3,665 | 3,737 | 3,832 | 3,821 | 4,133 |
Book Value Per Share ($) | 20.8 | 22.5 | 24.3 | 25.5 | 25.4 | 27.3 |
Tangible BVPS ($) | 13.4 | 14.7 | 16.7 | 17.8 | 17.7 | 19.7 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Diminishing Rate Sensitivity to Limit the Margin Growth this Year
After growing strongly in the last three quarters of 2022, the margin took a downturn in the first quarter of 2023, which negatively surprised me. The pressure on the margin was attributable to a big jump in funding costs as deposit rates caught up to market rates. Additionally, the deposit mix worsened as deposits migrated from non-interest-bearing accounts to high-rate certificates of deposits (“CD”).
The management has intentionally taken some measures to reduce its rate sensitivity ahead of interest rate cuts starting next year. These measures include the execution of receive-fixed swaps, as mentioned in the earnings presentation. While the topline will lose out this year from the reduced rate sensitivity, it will benefit next year when income won’t decline too much as rates dip.
The management’s rate-sensitivity simulation model shows that a 200-basis points hike in rates can now increase the net interest income by 6.8% over twelve months.
1Q 2023 Earnings Presentation
Considering these factors, I’m expecting the margin to remain unchanged for the remainder of the year from the first quarter’s level. Compared to my last report on the company, I’ve revised downwards my margin estimate because the management is actively trying to reduce the rate sensitivity.
Expecting Earnings to Grow by 12%
The anticipated loan growth will be the key earnings driver this year. On the other hand, inflation-driven growth in operating expenses will restrict earnings growth. Meanwhile, I’m expecting the margin to remain unchanged for the remainder of the year.
Overall, I’m expecting Associated Banc-Corp to report earnings of $2.63 per share for 2023, up 12% year-over-year. My updated earnings estimate is a little below my previous estimate of $2.66 per share because I’ve reduced both my loan growth and margin estimates. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 880 | 836 | 763 | 726 | 957 | 1,127 |
Provision for loan losses | - | 16 | 174 | (88) | 33 | 42 |
Non-interest income | 356 | 381 | 514 | 332 | 282 | 250 |
Non-interest expense | 822 | 794 | 776 | 710 | 747 | 818 |
Net income - Common Sh. | 323 | 312 | 286 | 334 | 352 | 397 |
EPS - Diluted ($) | 1.90 | 1.91 | 1.86 | 2.18 | 2.34 | 2.63 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Risk Level Appears Low
Associated Banc-Corp’s risk level is low amid the current stress in the banking sector. The company is relatively safe compared to its peers because it has 103% liquidity coverage for uninsured and uncollateralized deposits, as mentioned in the presentation. In the unlikely case of a deposit run, Associated Banc-Corp can access this liquidity without having to resort to selling its securities and realizing a loss on the sale.
Although there is very little chance that Associated Banc-Corp will need to sell its securities at a loss, there is still a possibility that the company will intentionally sell and realize some loss. The management could adopt this strategy if it could use the sale proceeds to grow income or reduce costs. In other words, the management may decide to take a small hit now for the sake of growth in the longer term.
Maintaining a Buy Rating
Associated Banc-Corp is offering a high dividend yield of 4.7% at the current quarterly dividend rate of $0.21 per share. The earnings and dividend estimates suggest a payout ratio of 32% for 2023, which is close to the five-year average of 35%. Therefore, I’m not expecting an increase in the dividend level this year.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Associated Banc-Corp. The stock has traded at an average P/TB ratio of 1.19 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 14.7 | 16.7 | 17.8 | 17.7 | |
Average Market Price ($) | 21.2 | 15.0 | 21.3 | 21.9 | |
Historical P/TB | 1.44x | 0.90x | 1.20x | 1.24x | 1.19x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $19.7 gives a target price of $23.6 for the end of 2023. This price target implies a 31.2% upside from the April 27 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.99x | 1.09x | 1.19x | 1.29x | 1.39x |
TBVPS - Dec 2023 ($) | 19.7 | 19.7 | 19.7 | 19.7 | 19.7 |
Target Price ($) | 19.6 | 21.6 | 23.6 | 25.5 | 27.5 |
Market Price ($) | 18.0 | 18.0 | 18.0 | 18.0 | 18.0 |
Upside/(Downside) | 9.2% | 20.2% | 31.2% | 42.2% | 53.2% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 9.6x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 1.91 | 1.86 | 2.18 | 2.34 | |
Average Market Price ($) | 21.2 | 15.0 | 21.3 | 21.9 | |
Historical P/E | 11.1x | 8.0x | 9.8x | 9.4x | 9.6x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $2.63 gives a target price of $25.1 for the end of 2023. This price target implies a 40.0% upside from the April 27 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 7.6x | 8.6x | 9.6x | 10.6x | 11.6x |
EPS 2023 ($) | 2.63 | 2.63 | 2.63 | 2.63 | 2.63 |
Target Price ($) | 19.9 | 22.5 | 25.1 | 27.8 | 30.4 |
Market Price ($) | 18.0 | 18.0 | 18.0 | 18.0 | 18.0 |
Upside/(Downside) | 10.7% | 25.4% | 40.0% | 54.6% | 69.2% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $24.3 , which implies a 35.6% upside from the current market price. Adding the forward dividend yield gives a total expected return of 40.3%.
Under normal circumstances, I would adopt a Strong Buy rating if the total expected return was this high. However, due to the current panic in the banking sector, I’ve decided to maintain a buy rating on Associated Banc-Corp.
For further details see:
Associated Banc-Corp Is Too Cheap Even Though Risks Are Low