2023-04-10 09:40:13 ET
Summary
- Loan growth and margin expansion will be lower this year relative to last year.
- The large balance of uninsured deposits has pushed up the risk level to moderate.
- The year-end target price suggests a high upside from the current market price. However, the dividend yield is only modest.
Earnings of Home Bancshares, Inc. (Conway, AR) ( HOMB ) will most probably increase this year on the back of subdued loan growth and slight margin expansion. I’m expecting the company to report earnings of $0.49 per share for the first quarter and $2.01 per share for the full year. The year-end target price suggests a high upside from the current market price. However, the company’s risk level is currently moderate. Considering these factors, I’m upgrading Home Bancshares to a buy rating.
Loan Growth to Dip After Fourth Quarter’s Extraordinary Performance
The loan portfolio grew by a remarkable 4.3% during the fourth quarter through organic means. Historically Home Bancshares has mostly grown through acquisitions, which makes the fourth quarter’s performance even more impressive. The growth also exceeded my expectations given in my last report on the company.
For 2023, I’m expecting loan growth to return to a level closer to the historical trend. As the company has not announced any M&A plans, I’m leaving out the acquisition factor and expecting growth to be entirely organic this year.
Around 80% of Home Bancshares’ loans are to borrowers in Arkansas, Florida, Texas, Alabama, and New York. Due to the significant variance between the economies of these states, I believe national average economic metrics are appropriate to gauge the demand for the company’s credit products.
The Federal Reserve projects the unemployment rate to rise to 4.5% this year, which is significantly higher than the current level but not too bad considering the rate in the previous decade. Considering the outlook for the labor market this year, I'm expecting business activity to remain at a satisfactory level, which will ensure that commercial loan growth is at a decent level.
The Federal Reserve for Projections, U.S. Bureau of Labor Statistics for Historical Data
Further, the PMI index provides a mixed outlook on business activity. The services PMI index is on a downtrend, but still in the expansionary territory (above 50), while the manufacturing PMI index is in the contractionary territory.
Considering these factors, I’m expecting the loan portfolio to grow by 2.0% in 2023. Further, I’m expecting other balance sheet items to grow in line with loans. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 10,963 | 10,768 | 10,975 | 9,599 | 14,120 | 14,404 |
Growth of Net Loans | 7.3% | (1.8)% | 1.9% | (12.5)% | 47.1% | 2.0% |
Other Earning Assets | 2,462 | 2,406 | 3,495 | 6,650 | 5,790 | 5,907 |
Deposits | 10,900 | 11,278 | 12,726 | 14,261 | 17,939 | 18,300 |
Borrowings and Sub-Debt | 1,985 | 1,140 | 939 | 912 | 1,222 | 1,246 |
Common equity | 2,350 | 2,512 | 2,606 | 2,766 | 3,526 | 3,739 |
Book Value Per Share ($) | 13.5 | 15.0 | 15.8 | 16.8 | 17.3 | 18.3 |
Tangible BVPS ($) | 7.7 | 9.0 | 9.7 | 10.8 | 10.1 | 11.2 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
Further Deceleration of the Rate of Margin Expansion Likely
The net interest margin’s pace of growth subsided in the fourth quarter of 2022. The margin expanded by just 16 basis points during the quarter, following the 41-basis points growth in the third quarter and 43-basis points growth in the second quarter of last year. The rate of expansion will decelerate further this year partly because the up-rate cycle is nearing its end. I’m expecting the fed funds rate to increase by 25-50 basis points till the mid of this year before plateauing.
Further, changes in the balance sheet’s position through last year have made the net interest income less sensitive to rate changes. At the end of 2021, the management’s rate simulation model showed that a 200-basis points hike in rates could increase the net interest income by 11.67%, as mentioned in the 10-K Filing for 2021 . The latest results of the simulation model given in the 10-K filing for 2022 show that a 200-basis points hike can increase the net interest income by a much lower 7.48%.
2022 10-K Filing
Considering these factors, I’m expecting the margin to increase by 10 basis points in 2023. In comparison, the margin expanded by 79 basis points from the end of 2021 till the end of 2022.
Earnings Outlook Remains Positive
The anticipated loan growth and margin expansion discussed above should drive up earnings this year. Overall, I’m expecting the company to report earnings of $2.01 per share for 2023, up 28% year-over-year.
Home Bancshares will announce its first-quarter results on April 20, 2023. I’m expecting the company to report earnings of $0.49 per share for the quarter, down 13% from the fourth quarter due to the normalization of non-interest income.
The following table shows my annual income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 561 | 563 | 583 | 573 | 759 | 882 |
Provision for loan losses | 4 | 1 | 112 | (5) | 64 | 40 |
Non-interest income | 103 | 100 | 112 | 138 | 175 | 171 |
Non-interest expense | 264 | 276 | 304 | 299 | 476 | 482 |
Net income - Common Sh. | 300 | 290 | 214 | 319 | 305 | 410 |
EPS - Diluted ($) | 1.73 | 1.73 | 1.30 | 1.94 | 1.57 | 2.01 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
In my last report on Home Bancshares, I estimated earnings of $2.07 per share for 2023. I’ve barely changed my earnings estimate because the fourth quarter’s results were in line with my expectations and because the outlook hasn’t changed much.
The Large Balance of Uninsured Deposits Raises the Risk Level
Home Bancshares’ available-for-sale (“AFS”) securities portfolio was of moderate size at the beginning of the up-rate cycle. Therefore, when the securities portfolio lost value as interest rates rose last year, the loss was bearable. These unrealized mark-to-market losses amounted to $408 million at the end of December 2022, which is as big as 12% of total equity. As a result, I believe the company is not too risky in the wake of the recent bank failures.
In some other areas as well, the company’s risk level is subdued. Home Bancshares does not have exposure to crypto assets or venture capital investments. Further, around 72% of the loan portfolio is backed by real estate.
However, one aspect that raises eyebrows is the large balance of uninsured deposits. At the end of 2022, uninsured deposits made up a whopping 51% of total deposits, according to details given in the 10-K filing.
Overall, I believe Home Bancshares’ risk level is currently moderate. I would have no problem taking on this risk, but all readers should consider their own risk tolerance before considering investing in Home Bancshares.
Upgrading to a Buy Rating
Home Bancshares is offering a dividend yield of 3.4% at the current quarterly dividend rate of $0.18 per share. The earnings and dividend estimates suggest a payout ratio of 36% for 2023, which is in line with the five-year average of 34%. Therefore, the dividend appears secure.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Home Bancshares. The stock has traded at an average P/TB ratio of 2.24x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 7.7 | 9.0 | 9.7 | 10.8 | 10.1 | |
Average Market Price ($) | 22.3 | 18.7 | 16.4 | 24.5 | 23.2 | |
Historical P/TB | 2.89x | 2.07x | 1.69x | 2.27x | 2.29x | 2.24x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $11.2 gives a target price of $25.0 for the end of 2023. This price target implies an 18.5% upside from the April 6 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 2.04x | 2.14x | 2.24x | 2.34x | 2.44x |
TBVPS - Dec 2023 ($) | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 |
Target Price ($) | 22.8 | 23.9 | 25.0 | 26.2 | 27.3 |
Market Price ($) | 21.1 | 21.1 | 21.1 | 21.1 | 21.1 |
Upside/(Downside) | 7.9% | 13.2% | 18.5% | 23.8% | 29.1% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 12.8x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 1.73 | 1.73 | 1.30 | 1.94 | 1.57 | |
Average Market Price ($) | 22.3 | 18.7 | 16.4 | 24.5 | 23.2 | |
Historical P/E | 13.0x | 10.8x | 12.6x | 12.6x | 14.8x | 12.8x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $2.01 gives a target price of $25.6 for the end of 2023. This price target implies a 21.1% upside from the April 6 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 10.8x | 11.8x | 12.8x | 13.8x | 14.8x |
EPS - 2023 ($) | 2.01 | 2.01 | 2.01 | 2.01 | 2.01 |
Target Price ($) | 21.6 | 23.6 | 25.6 | 27.6 | 29.6 |
Market Price ($) | 21.1 | 21.1 | 21.1 | 21.1 | 21.1 |
Upside/(Downside) | 2.2% | 11.7% | 21.1% | 30.6% | 40.1% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $25.3 , which implies a 19.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 23.2%.
In my last report, which was issued in October 2022, I adopted a hold rating with a December 2023 target price of $25.5. Since then, the stock price has plunged because of the recent bank failures and the resultant increase in riskiness. Considering the company’s moderate risk level and the updated total expected return, I’m upgrading Home Bancshares to a buy rating. However, I’d like to emphasize again that investors should consider their ability to bear risk when making an investment decision on Home Bancshares.
For further details see:
Home Bancshares: Upgrading To Buy But Risk Level Calls For Caution