• Tue. Nov 29th, 2022

S&T Bancorp Stock: Rate Hikes Main Earnings Catalyst

ByElla E. Kidwell

Sep 27, 2022

wellesenterprises

Earnings of S&T Bancorp, Inc. (NASDAQ: STBA) will most likely increase this year due to the sharp rise in market interest rates and their significant impact on net interest income. In addition, the loan portfolio will likely continue to grow, albeit at a rate a slower pace than in the second quarter. Overall, I expect S&T Bancorp to report earnings of $3.06 per share for 2022, up 9% year-over-year. Compared to my last report on the company, I increased my earnings estimate primarily because I increased my margin estimate. For 2023, I expect earnings to increase 2% to $3.11 per share. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on S&T Bancorp.

Topline’s High Rate Sensitivity to Drive Earnings

So far this year, interest rate hikes have been larger and earlier than expected. Moreover, the duration of the rate hike cycle is likely only halfway done, as the Federal Reserve expects the fed funds rate to rise another 125 to 150 basis points by the end of 2023. S&T Bancorp should gain significantly from the up-cycle in rates because its net interest income is very sensitive to changes in interest rates.

The average loan return has a high beta, as floating rate loans accounted for 52% of total loans at the end of June 2022, as mentioned in the results presentation. In addition, management has successfully improved its deposit mix over the past year and a half in anticipation of rising interest rates. Non-interest bearing deposits represented 36.0% of total deposits at the end of June 2022, compared to 30.5% at the end of December 2020.

Unfortunately, the cost of deposits is still quite rate sensitive, as unpaid demand, money market and savings accounts together accounted for 51.2% of total deposits at the end of June 2022. Due to their high beta , these deposits will limit margin expansion.

The results of management’s interest rate sensitivity analysis presented in File 10-Q show that a 200 basis point increase in interest rates could increase net interest income by 15.2 % the first year and 18.5% the second year. of rising rates.

S&T Bancorp Sensitivity to interest rates

Filing 2Q 2022 10-Q

Additionally, management mentioned on the conference call that it expects rates on new loans to be higher than rates on loan repayments by the third quarter of 2022. Accordingly, planned loan additions (discussed below) will further increase the net interest margin going forward.

Overall, I expect the margin to increase by 30 basis points in the second half of 2022 and another 10 basis points in 2023. Compared to my last report on S&T Bancorp, I have increased my estimate margin because my interest rate outlook is now more hawkish than before.

Regional labor markets will drive loan growth

S&T Bancorp’s loan portfolio grew by 1.1% in the second quarter of 2022, in line with my expectations. Loan growth will most likely slow in the second half from the second quarter level due to high interest rates. Consumer mortgages, which account for about 23% of total loans, are particularly susceptible to high borrowing costs. As shown below, mortgage rates are nearly a decade high.

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Data by YCharts

On the other hand, strong labor markets will prevent loan growth from slowing too much. S&T Bancorp operates primarily in Pennsylvania and Ohio and has a limited presence in Buffalo. Although Pennsylvania and Ohio currently have higher unemployment rates than the national average, labor markets have improved significantly in historical context.

Chart
Data by YCharts

Coincident state indices also show a satisfactory level of current economic activity.

Chart

Given these factors, I expect the loan portfolio to grow by 0.75% each quarter through the end of 2023. In my last report on S&T Bancorp, I expected loan growth higher by approximately 1.0% for each quarter. I have reduced my estimate of loan growth because my outlook for economic activity is more pessimistic than before.

Meanwhile, I expect other balance sheet items to grow somewhat in line with lending. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 5,886 7,075 7,108 6,901 7,047 7,261
Net loan growth 3.2% 20.2% 0.5% (2.9)% 2.1% 3.0%
Other productive assets 770 914 933 1,768 1,353 1,395
Deposits 5,674 7,037 7,421 7,997 7,727 7,961
Loans and sub-debts 604 416 228 161 117 121
Common equity 936 1,192 1,155 1,206 1,137 1,211
Book value per share ($) 26.8 34.4 29.6 30.9 29.1 31.0
Tangible BVPS ($) 18.5 23.3 19.8 21.2 19.4 21.3

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

The recent improvement in asset quality to maintain moderate provisioning despite inflation

S&T Bancorp’s provision charges remained below the historical average during the first half of 2022. In addition, credit quality improved rapidly, as a result of which S&T Bancorp’s provision-to-non-performing loan ratio jumped to 309% at the end of June 2022, compared to 149% at the end of June 2022. at the end of December 2021. The last quarter’s allocation coverage seems sufficient given the impact of the high inflation environment. Therefore, I don’t expect much pressure on provisioning from the existing portfolio. Loan additions are likely to be the main drivers of provision charges for the rest of the year.

Given these factors, I expect the provision charge to increase to a normal level in the second half of 2022. I expect the net provision charge to be approximately 0.25% of total loans each quarter through the end of 2023. In comparison, the net provision charge averaged 0.24% of total loans from 2017 to 2019.

Expect revenue to increase by 9%

Rising interest rates and the resulting spread expansion will likely be the main driver of earnings this year. In addition, net income will receive some support from low single-digit loan growth. On the other hand, non-interest income will decline due to the impending normalization of mortgage refinancing as well as lower income from wealth commissions. Management expects a quarterly expense outlook of $14-15 million, 6-12% below average quarterly revenue in the second half of last year.

Overall, I expect S&T Bancorp to report earnings of $3.06 per share for 2022, up 9% year-over-year. For 2023, I expect earnings to grow another 2% to $3.11 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 234 247 279 276 304 337
Allowance for loan losses 15 15 131 16 12 18
Non-interest income 49 53 60 65 56 53
Non-interest charges 145 167 187 189 198 219
Net income – Common Sh. 105 98 21 110 120 122
BPA – Diluted ($) 3.01 2.82 0.53 2.81 3.06 3.11

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

In my last report on S&T Bancorp, I estimated earnings of $2.87 per share for 2022. I increased my earnings estimate primarily because I revised my margin estimate upwards.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Maintaining a Buy rating due to a high rising price

S&T Bancorp offers a dividend yield of 4.0% at the current quarterly dividend rate of $0.30 per share. Earnings and dividend estimates suggest a payout ratio of 39% for 2023, which is in line with the 2017-2021 (ex-2020) average of 38%. Therefore, I do not expect an increase in the level of dividends.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value S&T Bancorp. The stock has traded at an average P/TB ratio of 1.67 in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 18.5 23.3 19.8 21.2
Average market price ($) 42.5 38.2 25.4 30.8
Historical P/TB 2.29x 1.64x 1.29x 1.46x 1.67x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $19.4 yields a target price of $32.3 for the end of 2022. This price target implies an upside of 6.5% compared to the closing price on September 26. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.47x 1.57x 1.67x 1.77x 1.87x
TBVPS – Dec 2022 ($) 19.4 19.4 19.4 19.4 19.4
Target price ($) 28.4 30.4 32.3 34.3 36.2
Market price ($) 30.4 30.4 30.4 30.4 30.4
Up/(down) (6.3)% 0.1% 6.5% 12.8% 19.2%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 12.9x in the past, as shown below (I excluded the outlier in 2020 from the average).

EX18 FY19 FY20 FY21 T. Average
Earnings per share ($) 3.01 2.82 0.53 2.81
Average market price ($) 42.5 38.2 25.4 30.8
Historical PER 14.1x 13.6x 48.0x 11.0x 12.9x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $3.06 yields a price target of $39.4 for the end of 2022. This price target implies a 29.7% upside from at the closing price on September 26. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 10.9x 11.9x 12.9x 13.9x 14.9x
EPS 2022 ($) 3.06 3.06 3.06 3.06 3.06
Target price ($) 33.3 36.3 39.4 42.4 45.5
Market price ($) 30.4 30.4 30.4 30.4 30.4
Up/(down) 9.6% 19.6% 29.7% 39.8% 49.9%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $35.8, implying an 18.1% upside from the current market price. Adding the forward dividend yield gives an expected total return of 22.0%. Therefore, I maintain a buy rating on S&T Bancorp.