Eastern Bankshares: acquisition, economic factors to increase revenue (NASDAQ: EBC)


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Earnings for Eastern Bankshares, Inc. (NASDAQ: EBC) will likely trend higher this year, primarily due to the acquisition of Century Bancorp late last year, which will keep the average loan balance for 2022 at a high level. Additionally, the economic recovery in Eastern Bankshares markets will support some organic loan growth this year. In addition, the company will benefit from a rising interest rate environment. However, most of the impact of rising interest rates will be felt next year. Overall, I expect Eastern Bankshares to post earnings of $1.07 per share in 2022, up 19% year-over-year. The year-end target price is quite close to the current market price. Accordingly, I adopt a Hold rating on Eastern Bankshares.

Mergers and acquisitions, economic strength to generate higher average loan balance

Eastern Bankshares completed the acquisition of Century Bancorp on November 12, 2021, according to the latest earnings release. Although the acquisition added $3 billion in loans, Eastern Bankshares’ total loan book grew by just under $3 billion in the fourth quarter of 2021. As peer banks saw good growth from the balance sheet last quarter, the organic trend for Eastern Bankshares Bankshares looks a little worrying.

Additionally, management suggested on the conference call that some loan liquidation in the acquired portfolio was possible if deemed appropriate. In addition, the upcoming cancellation of Paycheck Protection Program (“PPP”) loans will limit loan growth. A large PPA balance remained to be forgiven at the end of the last quarter. As mentioned in the presentation of the results, outstanding PPP loans amounted to $331 million at the end of December 2021, or 2.7% of total loans. I expect most of these loans to be canceled in the first half of 2022, which will have a significant impact on the total size of the loan portfolio.

On the other hand, economic strength will likely stimulate demand for credit. Eastern Bankshares operates in the states of Massachusetts, New Hampshire and Rhode Island, all of which have recovered remarkably well from the pandemic, as can be judged by the unemployment rate shown below.

Data by YCharts

Overall, I expect the loan portfolio to grow by 4% in 2022. The average loan balance this year will likely be significantly higher than last year due to the acquisition of Century Bancorp around the end of 2021. I expect the average balance in 2022 to be 23% higher than the average balance in 2021.

In the meantime, I expect deposit growth to be lower than loan growth as management intends to reposition Century Bancorp’s funding over the next few quarters. Additionally, Eastern Bankshares expects to sell $500 million of cannabis-related deposits in the second quarter of 2022, as mentioned in the earnings presentation. Management also intends to keep the securities portfolio stable at the current level and expects the cash position to normalize this year. The following table shows my balance sheet estimates.

FY19 FY20 FY21 FY22E
Financial situation
Net loans 8,899 9,594 12,157 12,651
Net loan growth N / A 7.8% 26.7% 4.1%
Other productive assets 1,736 5,122 9,600 9,600
Deposits 9,551 12,156 19,628 20,024
Loans and sub-debts 235 28 34 34
Common equity 1,600 3,428 3,406 3,547
Book value per share ($) N / A 18.4 18.2 19.0
Tangible BVPS ($) N / A 16.3 14.8 15.5
Source: SEC Filings, Author’s Estimates
(In millions of dollars, unless otherwise indicated)

Margin to benefit from higher interest rates with a time lag

Eastern Bankshares may benefit from rising interest rates as its average deposit cost is somewhat sticky on the upside. Although the proportion of non-interest bearing deposits in total deposits decreased in 2021, this proportion was still substantially high at the end of 2021. Non-interest bearing deposits represented 35.8% of total deposits at the end of 2021. from last year.

In addition, around 40% of the total loan portfolio will be re-evaluated within one month after the interest rate hike, as mentioned in the presentation. This will help the average portfolio yield to rise slightly once the fed funds rate increases. As the majority of the portfolio will not be repriced any time soon, most of the impact of rate hikes will be felt with a lag, most likely in 2023.

According to management’s interest rate sensitivity analysis presented in the third quarter filing 10-Q, a 200 basis point increase in interest rates could increase net interest income by 18.2% over twelve months. Given the factors mentioned above and direction from management, I expect the net interest margin to increase two basis points in the third quarter of 2022 and then another two basis points in the last quarter. of this year.

Earnings expected to rise to $1.07 per share

Higher average loan balances and expanding spreads will likely drive earnings growth this year. On the other hand, the provision charge will probably turn positive again this year, which will limit the growth of profits. After significant reserve releases in 2021, endowments are now at a comfortable level. Therefore, I do not expect any further significant provision reversals this year. As mentioned in the presentation, provisions made up 279.5% of non-performing loans at the end of last year.

Overall, I expect Eastern Bankshares to post earnings of $1.07 per share in 2022, up 19% year-over-year. The following table shows my income statement estimates.

FY19 FY20 FY21 FY22E
income statement
Net interest income 411 401 430 517
Allowance for loan losses 6 39 (ten) 2
Non-interest income 182 178 193 198
Non-interest charges 413 505 444 480
Net income – Common Sh. 135 23 155 184
BPA – Diluted ($) N / A 0.13 0.90 1.07
Source: SEC Filings, Earnings Releases, Author’s Estimates
(In millions of dollars, unless otherwise indicated)

Compared to previous estimates given in my last report on Eastern Bankshares, I have only slightly changed my earnings estimate. The slight upward revision is due to a higher estimate of loan balances and an increase in expected non-interest income. Fourth quarter non-interest income surprised me positively, leading me to believe that I had previously underestimated it.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic and the timing of an interest rate hike.

Small upside price warrants a hold rating

Eastern Bankshares offers a dividend yield of 1.9% at the current quarterly dividend rate of $0.10 per share. Earnings and dividend estimates suggest a 37% payout ratio for 2022, which is sustainable. Therefore, I don’t believe there is a threat of a dividend cut.

The following table shows the valuation multiples of some of Eastern Bankshares’ closest peers, as reported by Seeking Alpha.

Comparison with peers
P/E GAAP (“FWD”) 12.0x 17.6x 13.0x 16.7x 16.9x 15.24x
P/E GAAP (“TTM”) 12.5x 14.9x 11.1x 14.0x 14.3x 13.36x
Reserve Price (“TTM”) 1.5x 1.2x 1.3x 2.5x 1.4x 1.56x
Source: Alpha Research
Data extracted at market close on February 10, 2022

Multiplying the average P/B multiple by the expected book value per share of $19.0 yields a target price of $29.7 for the end of 2022. This price target implies a 41.3% upside from relative to the closing price on February 11. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/B 1.36x 1.46x 1.56x 1.66x 1.76x
BVPS – Dec 2022 ($) 19.0 19.0 19.0 19.0 19.0
Target price ($) 25.9 27.8 29.7 31.6 33.5
Market price ($) 21.0 21.0 21.0 21.0 21.0
Up/(down) 23.3% 32.3% 41.3% 50.4% 59.4%
Source: Author’s estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.07 yields a price target of $14.3 for the end of 2022. This price target implies a 32% decline from the stock price. closing on February 11. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 11.4x 12.4x 13.4x 14.4x 15.4x
EPS – 2022 ($) 1.07 1.07 1.07 1.07 1.07
Target price ($) 12.1 13.2 14.3 15.4 16.4
Market price ($) 21.0 21.0 21.0 21.0 21.0
Up/(down) (42.3)% (37.2)% (32.1)% (27.0)% (21.9)%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $22.0, implying a 4.6% upside from the current market price. Adding the forward dividend yield gives an expected total return of 6.5%. Therefore, I adopt a Hold rating on Eastern Bankshares. My previous note on the title was also Hold. I would consider investing in the stock if its price drops more than 10% from the current level.


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