Banc of California (BANC): Top-line Outlook Remains Bright Despite Recent Performance
The downward trend in Banc of California’s ( NYSE:BANC ) loan portfolio is likely to reverse this year thanks to strong regional economies. Further, margin is likely to continue to expand this year, which will boost the top line. However, the bottom is likely to fall in 2023 due to inflation and the normalization of provisioning expenses. Overall, I expect Banc of California to report earnings of $1.70 per share for 2023, down 10% year over year. Compared to my last report on the company, I have lowered my earnings estimate slightly following the disappointing fourth quarter results. The target price of December 2023 suggests a small upside from the current market price. Therefore, I am downgrading Banc of California to a hold rating.
Margin rate sensitivity in 2023 likely to be similar to last year
Banc of California’s net interest margin has barely correlated with interest rates in prior years, as shown below.
However, the correlation improved last year (see above) because the deposit mix improved significantly during 2021. While the shift in the deposit mix slowed in 2022, I expect the deposit beta in 2023 to be similar to the beta of deposits in 2022. The results of the management’s rate sensitivity analysis provided in the 10-K filing show that a 200 basis point increase in interest rates could increase net interest income by only 2.1% over twelve months.
On the plus side, new loan production will provide a material boost to margins. Banc of California issued new loans at a rate of 6.81% (average) in the fourth quarter of 2022, which is much higher than the average portfolio yield of 4.92%, as mentioned in the earnings presentation. Therefore, new loans can be expected to significantly increase the average loan yield of the loan portfolio in the near term.
Further, reinvestment rates in Treasuries are also much higher now than in the previous quarter. Short-term Treasury yields have risen, as shown below.
Taking these factors into account, I expect the margin to increase by 10 basis points in 2023.
The negative trend in credit growth is likely to reverse
For the second quarter in a row, the performance of the loan portfolio missed my expectation. Portfolio size fell 2.3% over the last quarter, leading to an overall decline of 1.8% for the year. In my opinion, there is a chance that this negative trend will change this year due to a positive regional economy. Banc of California operates throughout California with its presence concentrated in the southern part of the state from San Diego to Santa Barbara. The economic activity of the state has recently been commendable compared to the rest of the country.
Additionally, local unemployment rates are quite low, especially in Santa Barbara, compared to the national average.
Data from YCharts
Further, management mentioned on the conference call that it plans to continue hiring new talent this year, which will drive loan growth.
Taking these factors into account, I expect the loan book to grow 4% in 2023. Compared to my last Banc of California report, I have not changed my growth estimate for 2023. However, my balance sheet estimate of the loan is much lower than before because the portfolio fell in the fourth quarter of 2022, while I expected positive growth.
Meanwhile, I expect deposits to grow in line with loans. The table below shows my balance estimates.
Financial position FY18 FY19 FY20 FY21 FY22 Net Net Credit 7,639 5,894 5,817 7,159 7,029 7,314 Net Credit Increase 15.6% (22.8)% (1.3)% 23.1% 4.1% ASSETS ASSETS 2,370 1,280 1,280 1,280 1,280 1. and sub-deshi 1,696 1,398 822 820 1,002 1,022 Common equity 714 717 712 970 960 1,038 Book value per share ($) 14.2 14.3 14.3 16.0 16.1 17.1 TAGN BVPS ($) Entries, valuations unless specified (In million USD) otherwise) Click to enlarge Earnings are expected to decrease by 10%
Low loan growth and margin expansion will drive the top line this year and support earnings as a result. However, inflation-driven increases in operating expenses will drag on the bottom line. Further, provisioning for expected loan losses is likely to return to a normal level this year after significant reversals of provisions last year. Normalization of provisions will drag down revenues this year.
Overall, I expect Banc of California to report earnings of $1.70 per share for 2023, down 10% year over year. The table below shows my income statement estimates.
Income statement FY18 FY19 FY20 FY21 FY22 FY23E Net interest income 286 248 225 254 314 332 Provision for loan losses 30 36 30 7 (32) 14 Interest income 24 1919 3912 30 19 19 19 30 19 24 19 19 12 Revenue – Class A 23 3 (1) 50 115 103 EPS – Diluted – Class A ($) 0.45 0.05 -0.02 0.95 1.89 1.70 Source: SEC Filings, Releases of earnings, Author estimates (In million USD) Click otherwise to enlarge
In my last report for Banc of California, I estimated earnings of $1.75 per share for 2023. I lowered the earnings estimate slightly after cutting loan balance and non-interest income estimates following disappointing fourth-quarter results.
My estimates are based on certain macroeconomic assumptions that may not materialize. Therefore, actual earnings may differ materially from my estimates.
Downgrade to a holding rating
Banc of California is offering a dividend yield of 2.4% with its current quarterly dividend rate of $0.10 per share. Earnings and dividend estimates suggest a payout ratio of 24% for 2023, which is easily sustainable. Therefore, the dividend looks safe.
I’m using the historical price-to-tangible (“P/TB”) and average price-to-earnings (“P/E”) multiples to value Banc of California. BANC shares have traded at an average P/TB ratio of 1.19 in the past, as shown below.
FY18 FY19 FY20 FY21 FY22 Average T. Book Value per Share ($) 13.3 13.5 13.5 14.3 14.0 Average Market Price ($) 18.9 14.6 12.1 18.5 18.0 Historical 11×09 P/x2. Finance, Yahoo Finance, Author Ratings Click to enlarge
Multiplying the average P/TB multiple by the estimated tangible book value per share of $15.1 yields a price target of $18.0 for the end of 2023. This price target implies a 7.0% upside from closing price on March 7. The table below shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple 0.99x 1.09x 1.19x 1.29x 1.39x TBVPS – Dec 2023 ($) 15.1 15.1 15.1 15.1 15.1 Price Target ($) 15.0 15.0 16.011 19.691 on the market side. ) (10.9)% (2.0)% 7.0% 15.9% 24.9% Source: Author’s estimates Click to enlarge
Historically, Banc of California’s P/E multiple has been very erratic. Therefore, it is better to take the peer average to value the company instead of the historical average. As of the March 7 close, the average P/E ratio was around 10.4x, as shown below.
BANC PFBC FBMS TMP HFWA BRKL Peer Average P/E GAAP (“fwd”) 10.38 6.94 10.5 13.2 10.7 9.3 10.1 P/E GAAP (“ttm”) 9.1 7.98 17.4 11.1 .
Multiplying the average P/E multiple by the projected earnings per share of $1.70 gives a target price of $17.6 for the end of 2023. This price target implies a 4.4% upside from the closing price of March 7. The table below shows the sensitivity of the target price to the P/E ratio.
P/E Multiple 8.4x 9.4x 10.4x 11.4x 12.4x EPS 2023 ($) 1.70 1.70 1.70 1.70 1.70 Price Target ($) 14.2 15.9 17.6 19.6 $19.622 (market-side) 15.7% (5.7)% 4.4% 14.4% 24.5% Click to enlarge
Equally weighting the target prices from the two valuation methods yields a combined target price of $17.8, which implies an upside of 5.7% from the current market price. Adding the future dividend yield gives a total expected return of 8.1%.
In my last report on Banc of California, I endorsed a Buy rating with a December 2023 price target of $17.1. Since then, the share price has risen strongly. As a result, the stock is now offering only a small upside. Therefore, I am downgrading Banc of California shares to a Hold rating.