2023-03-20 05:35:57 ET
Summary
- Berkshire Hills Bancorp's current price-to-tangible book multiple is roughly in line with the peer mean; it is hard for BHLB to command a valuation premium over peers considering its modest ROA goal.
- Berkshire Hills Bancorp's dividend yield isn't as attractive as most of its peers; the company's actual 2023 share buybacks might also fall short of expectations.
- I rate BHLB as a Hold on the basis that its shares are fairly valued and there aren't any visible short-term catalysts for the stock.
Elevator Pitch
My investment rating for Berkshire Hills Bancorp, Inc.'s ( BHLB ) shares is a Hold. BHLB's expected dividends and share repurchases for 2023 are unlikely to excite the market, while its ROA target for June 2024 is still below the peer average. Berkshire Hills Bancorp's shares are fairly valued based on the price-to-tangible book valuation metric, and I haven't identified any meaningful catalysts for the stock. Therefore, I have a Neutral view and a Hold rating for BHLB.
Company Description
In its fiscal 2022 10-K filing , Berkshire Hills Bancorp refers to itself as "the holding company for Berkshire Bank", a community bank with a presence in "New England and New York." As per the company's February 2023 investor presentation , BHLB boasts a network of 100 banking branches, a staff strength of approximately 1,300, and assets of around $11.7 billion as of the end of last year.
A Breakdown Of Berkshire Hills Bancorp's Loans And Deposits As Of December 31, 2022
BHLB's February 2023 Investor Presentation
Valuations And Return On Assets
Berkshire Hills Bancorp's recent share price performance has been poor. In the last year, BHLB's stock price fell by -18.4% , while the S&P 500 declined by -11.2% in the same time period. As such, it is worth reviewing BHLB's current valuations in light of the stock's stock price underperformance to determine if a buying opportunity has emerged for the company's shares.
Peer Valuation Comparison For Berkshire Hills Bancorp
Stock | Historical Trailing Price-to-Tangible Book Value Or P/TBV Multiple | Consensus Forward Next Twelve Months' Normalized P/E Multiple | Consensus Forward Next Twelve Months' Dividend Yield | Consensus Current Fiscal Year Return On Assets Or ROA Metric |
Berkshire Hills Bancorp | 1.15 | 9.66 | 2.95% | 0.96% |
Peer Average Excluding BHLB | 1.18 | 8.40 | 4.89% | 1.13% |
Flushing Financial Corporation ( FFIC ) | 0.67 | 10.30 | 5.98% | 0.52% |
Brookline Bancorp, Inc. ( BRKL ) | 0.99 | 7.27 | 5.15% | 1.13% |
Eagle Bancorp, Inc. ( EGBN ) | 1.00 | 7.49 | 5.07% | 1.28% |
OceanFirst Financial Corp. ( OCFC ) | 1.03 | 6.99 | 4.28% | 1.19% |
Sandy Spring Bancorp, Inc. ( SASR ) | 1.12 | 8.51 | 5.00% | 1.06% |
Lakeland Bancorp, Inc. ( LBAI ) | 1.29 | 8.45 | 3.65% | 1.16% |
Fulton Financial Corporation ( FULT ) | 1.32 | 7.57 | 4.68% | 1.19% |
Provident Financial Services, Inc. ( PFS ) | 1.32 | 8.07 | 4.85% | 1.08% |
Northwest Bancshares, Inc. ( NWBI ) | 1.44 | 10.75 | 6.44% | 1.03% |
S&T Bancorp, Inc. ( STBA ) | 1.58 | 8.57 | 3.83% | 1.61% |
Source: S&P Capital IQ
It is tough to argue that Berkshire Hills Bancorp's shares are undervalued. BHLB's historical trailing P/TBV multiple of 1.15 times is roughly on par with its peers' mean P/TBV ratio of 1.18 times. The market values Berkshire Hills Bancorp at 9.66 times consensus forward next twelve months' normalized P/E, which represents a +15% premium as compared to the peer mean forward P/E metric of 8.40 times. But BHLB's consensus FY 2023 ROA estimate of 0.96% is inferior to its peers' average consensus current fiscal year ROA forecast of approximately 1.13%.
Looking ahead, Berkshire Hills Bancorp has set a goal of improving its ROA from 0.89% for full-year FY 2022 to 1.025% (as per mid-point of financial target) by the middle of 2024 as revealed in its February 2023 investor presentation. In other words, BHLB's ROA isn't expected to exceed the peer average (1.13%) in one year's time. In that respect, a substantial positive re-rating of Berkshire Hills Bancorp's valuations in the short term is unlikely, taking into account its modest ROA target.
In the next section of the article, I explore potential catalysts for Berkshire Hills Bancorp relating to shareholder capital return.
Shareholder Capital Return
BHLB's current and targeted ROAs are lower than what peers are expected to deliver, so a ROA improvement isn't a probable re-rating catalyst for the stock. The other potential catalyst to consider for Berkshire Hills Bancorp is better than expected shareholder capital return.
In relation to dividends, Berkshire Hills Bancorp raised its quarterly dividend payout by a significant +50% to from $0.18 per share in the recent quarter. This translates into a full-year dividend per share payment of $0.72, which implies that BHLB currently offers a 2.9% dividend yield based on its last done stock price of $24.42 as of March 17, 2023. It is encouraging that Berkshire Hills Bancorp has initiated a meaningful dividend hike, and its dividend yield is decent in absolute terms. But as I highlighted in the preceding section, the mean dividend yield for BHLB is much higher at 4.2%. As such, Berkshire Hills Bancorp's recent dividend raise is still insufficient to entice income-focused investors to switch from other banking stocks to BHLB.
With respect to share repurchases, Berkshire Hills Bancorp's actual share buybacks for the current year could be lower than what it did in the previous year. In 2022, BHLB spent $125 million repurchasing 4.5 million of its own shares (or close to 10% of its shares outstanding). In comparison, Berkshire Hills Bancorp is only expecting to buy back as much as 4% of its outstanding shares with its new $50 million share buyback program which expires on December 31, 2023. Furthermore, BHLB emphasized at its Q4 2022 earnings call on January 26, 2023 that its "top priority is to deploy capital to support organic growth", and stressed that it is "biased to opportunistic stock repurchases." This suggests that BHLB might even spend much less than $50 million on share repurchases in 2023.
In a nutshell, I don't think that Berkshire Hills Bancorp's actual shareholder capital return in terms of both dividends and share buybacks in 2023 will be a positive catalyst for the stock in the near term.
Bottom Line
BHLB's P/TBV ratio of 1.15 times is just slightly below the peers' average valuation multiple of 1.18 times, which I deem as reasonably fair. After reviewing its June 2024 ROA target and its expected shareholder capital return for 2023, I think it is unlikely for BHLB's shares to rise significantly in the absence of catalysts. This explains why I have awarded a Hold rating to Berkshire Hills Bancorp.
For further details see:
Berkshire Hills Bancorp: Consider Valuations And Shareholder Capital Return