Share Buyback Plans And Acquisition Pressure Will Shape Regional Banking’s Future

Key Takeaways

• Successful merger and strong local market focus enhance competitive positioning and potential for revenue growth in key geographic regions.
  
• Expansion of digital banking platforms improves customer experience and positions Eastern Bankshares for increased market share and future revenue growth.
  
• Increased reserves and non-performing office loans signal potential asset quality concerns, impacting earnings and profitability in the short term.

Catalysts

Operates as the bank holding company for Eastern Bank that provides banking products and services primarily to retail, commercial, and small business customers.

• The successful merger with Cambridge Trust and its integration into Eastern Bankshares creates a stronger organization with enhanced service offerings, which is expected to drive future revenue and earnings growth, particularly in the Greater Boston, Eastern Massachusetts, and New Hampshire markets.
  
• Eastern Bankshares' expansion of its online and mobile banking platform provides opportunities to improve customer experience and capture market share, likely boosting future revenue and net margins.
  
• The bank's focus on local markets, combined with becoming the largest community bank in the Greater Boston area and a leading wealth management provider, positions it for potential revenue growth and stronger competitive standing in these regions.
  
• The future accretion of the discount on acquired loans from the Cambridge merger, estimated to generate $12 million to $14 million per quarter, is expected to positively impact earnings, providing a predictable income stream.
  
• A strong credit reserve (1.4%) and an aggressive approach to loan loss provisioning offer stability and confidence in future earnings, supporting margin protection and potentially improving net margins as market conditions stabilize.

Eastern Bankshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eastern Bankshares's revenue will grow by 21.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.8% today to 40.0% in 3 years time.
• Analysts expect earnings to reach $434.1 million (and earnings per share of $2.11) by about January 2028, up from $90.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 39.2x today. This future PE is lower than the current PE for the US Banks industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Eastern Bankshares Future Earnings Per Share Growth

Risks

• Recent increases in reserves for commercial real estate loans, particularly office loans, suggest potential concerns about asset quality, which could negatively impact earnings.
  
• A GAAP net loss was reported this quarter due to significant non-recurring merger items, indicating potential volatility in short-term financial performance.
  
• A large portion of non-performing loans is related to office real estate, a sector facing challenges, which could further impact asset quality and eventually bottom line earnings.
  
• The need to maintain a higher level of reserves for potential loan losses, especially in commercial real estate, may affect net margins and overall profitability.
  
• The sale of Cambridge's investment portfolio and the absence of associated accretion income could lead to lower income levels than initially projected, impacting future revenue streams.

Valuation

• The analysts have a consensus price target of $19.5 for Eastern Bankshares based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $434.1 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $17.54, the analyst's price target of $19.5 is 10.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.