Summary
- Deployment of excess cash into higher-yielding assets will continue to boost the margin in the coming quarters.
- Loan growth will likely continue to expand at the stable and steady rate that has been observed in previous years.
- The December 2023 target price suggests a high upside from the current market price. Further, TRST is offering a decent dividend yield.
Earnings of TrustCo Bank Corp NY ( TRST ) will most probably surge in the coming quarters due to mid-single-digit loan growth. Further, continued deployment of excess cash into higher-yielding assets will lift the margin, and consequently the earnings. Overall, I'm expecting TrustCo to report earnings of $3.85 per share for 2022, up 21% year-over-year. For 2023, I'm expecting the company to report earnings of $4.00 per share, up 4% year-over-year. Compared to my last report on the company, I've raised my earnings estimates for both years mostly because I've raised my margin estimates. Next year’s target price suggests a significant upside from the current market price. Therefore, I’m maintaining a buy rating on TrustCo Bank Corp NY.
Revising Upwards the Margin Estimate
TrustCo’s net interest margin expanded by 33 basis points in the third quarter after growing by 17 basis points in the second quarter of 2022. This is quite an achievement given the margin is not very rate sensitive. Residential real estate loans make up 95% of TrustCo's total loans. As most residential mortgages are based on fixed rates, the yields of existing loans don't move much as rates rise. As shown below, the margin has been barely correlated to interest rate changes in the past.
The margin expansion so far this year is attributable to the deployment of excess liquidity into higher-yielding assets and the resultant improvement in the asset mix. Even after the deployment, the excess cash position is higher than the pre-pandemic level, as shown below (fed funds sold, and other short-term investments are cash equivalents). Therefore, there is still room for further asset mix improvement and resultant margin expansion.
There is a material difference between the average yields earned on “fed funds sold and other short-term investments” and loans and held-to-maturity securities, as shown below. Therefore, an asset mix improvement can have a sizable impact on margin expansion in the future.
Asset Class | Average Yield in 3Q 2022 |
Loans | 3.57% |
HTM Securities | 4.08% |
AFS Securities | 2.12% |
Fed funds sold and other short-term investments | 2.25% |
Source: 3Q 2022 Earnings Release |
Considering these factors, I'm expecting the net interest margin to increase by ten basis points in the fourth quarter of 2022 and then increase by five basis points in 2023. As the margin increased by more than I anticipated during the third quarter, I've raised my margin estimates for the coming quarters. In my last report, I expected the margin to average 2.9% in 2023. My updated margin estimate is 3.4% for 2023.
Loan Growth to Remain Steady Like Previous Years
TrustCo Bank is a very stable bank that manages to grow its loan book by mid-single-digit rates every year. Macroeconomic headwinds and tailwinds do not seem to affect the company's business as much as they impact the business of peer banks. This quality sheds a positive light on the management’s capabilities. It also gives me confidence that TrustCo can handle and ride out the higher-rate environment without suffering much. TrustCo is focused on residential mortgage loans; therefore, borrowing costs are a big driver of credit demand in the company's market. Mortgage rates are near multi-year highs, as shown below.
Additionally, home prices in TrustCo's markets of New York, New Jersey, and Florida have recently been on a steep uptrend, which is bad news for future residential mortgage demand.
On the plus side, the loan application backlog at the third quarter's end was equivalent to the backlog at the end of the second quarter and above that of last year, as mentioned in the conference call . Therefore, the strong growth witnessed in the third quarter will continue in the last quarter of 2022. This will likely lead to the full year's loan growth being at the higher end of the historical range. However, loan growth will likely be at the lower end of the historical range next year due to the factors discussed above.
Meanwhile, I'm expecting deposits to grow in line with loans. Further, I'm expecting loan growth to crowd out the growth of other assets. The following table shows my balance sheet estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Financial Position | ||||||
Net Loans | 3,829 | 4,018 | 4,195 | 4,395 | 4,630 | 4,818 |
Growth of Net Loans | 6.6% | 4.9% | 4.4% | 4.8% | 5.4% | 4.1% |
Other Earning Assets | 987 | 1,010 | 1,518 | 1,594 | 1,252 | 1,290 |
Deposits | 4,274 | 4,450 | 5,037 | 5,268 | 5,335 | 5,551 |
Borrowings and Sub-Debt | 162 | 149 | 268 | 297 | 172 | 178 |
Common equity | 490 | 538 | 568 | 601 | 602 | 651 |
Book Value Per Share ($) | 5.1 | 5.6 | 29.4 | 31.2 | 31.5 | 34.1 |
Tangible BVPS ($) | 5.1 | 5.6 | 29.4 | 31.2 | 31.5 | 34.1 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
Earnings Likely to Surge by 21% This Year
The anticipated loan growth and asset mix improvement discussed above will likely drive earnings through the end of 2023. Meanwhile, the provisioning for expected loan losses will likely remain at a normal level of around 0.03% of total loans. Overall, I’m expecting TrustCo to report earnings of $3.85 per share for 2022, up 21% year-over-year. For 2023, I'm expecting earnings to grow by 3.8% to $4.00 per share. The following table shows my income statement estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Income Statement | ||||||
Net interest income | 161 | 156 | 154 | 160 | 180 | 202 |
Provision for loan losses | 1 | 0 | 6 | (5) | 0 | 2 |
Non-interest income | 18 | 19 | 17 | 18 | 19 | 17 |
Non-interest expense | 98 | 98 | 96 | 102 | 101 | 115 |
Net income - Common Sh. | 61 | 58 | 52 | 62 | 74 | 76 |
EPS - Diluted ($) | 0.64 | 0.60 | 2.72 | 3.19 | 3.85 | 4.00 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
In my last report on TrustCo, I estimated earnings of $3.51 per share for 2022 and $3.49 per share for 2023. I've increased my earnings estimates mostly because I've raised my margin estimates.
My estimates are based on certain macroeconomic assumptions that may not come to pass. Therefore, actual earnings can differ materially from my estimates.
Maintaining a Buy Rating
TrustCo Bank is offering a dividend yield of 3.8% at the current quarterly dividend rate of $0.35 per share. The earnings and dividend estimates suggest a payout ratio of 35% for 2023, which is in line with the four-year average of 33%. Therefore, I’m not expecting an increase in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value TrustCo Bank. The stock has traded at an average P/TB ratio of 1.13 in the past, as shown below.
Multiplying the average P/TB multiple with the forecast tangible book value per share of $34.1 gives a target price of $38.6 for the end of 2023. This price target implies a 3.7% upside from the November 4 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.93x | 1.03x | 1.13x | 1.23x | 1.33x |
TBVPS - Dec 2023 ($) | 34.1 | 34.1 | 34.1 | 34.1 | 34.1 |
Target Price ($) | 31.8 | 35.2 | 38.6 | 42.0 | 45.4 |
Market Price ($) | 37.2 | 37.2 | 37.2 | 37.2 | 37.2 |
Upside/(Downside) | (14.6)% | (5.4)% | 3.7% | 12.9% | 22.0% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 11.2x in the past, as shown below.
Multiplying the average P/E multiple with the forecast earnings per share of $4.00 gives a target price of $44.6 for the end of 2023. This price target implies a 19.8% upside from the November 4 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 9.2x | 10.2x | 11.2x | 12.2x | 13.2x |
EPS 2023 ($) | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 |
Target Price ($) | 36.6 | 40.6 | 44.6 | 48.6 | 52.6 |
Market Price ($) | 37.2 | 37.2 | 37.2 | 37.2 | 37.2 |
Upside/(Downside) | (1.6)% | 9.1% | 19.8% | 30.6% | 41.3% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $41.6 , which implies an 11.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 15.5%. Hence, I’m maintaining a buy rating on TrustCo Bank Corp NY.
For further details see:
TrustCo Bank: Strong Earnings Growth On The Cards