Heartland Merger And Diversified Services To Propel Growth Amidst Analysts' Mixed Projections - Simply Wall St (2024)

Key Takeaways

• Merger with Heartland Financial is poised to boost UMB's service range, potentially escalating revenues through synergies and enlarged market footprint.
  
• Strong loan growth, notably in commercial real estate and construction, alongside solid credit metrics, signals promising revenue and profitability prospects.
  
• UMB Financial faces operational and profitability risks from Heartland acquisition integration, depositor inflow sustainability, sector-specific regulatory changes, and interest rate fluctuations.

Catalysts

About UMB Financial

Operates as the bank holding company that provides banking services and asset servicing in the United States and internationally.

What are the underlying business or industry changes driving this perspective?

• UMB Financial's merger with Heartland Financial is expected to enhance UMB's growth strategy by offering a broader and more diversified range of financial services, potentially increasing revenues and net income through synergies and expanded market presence.
  
• The company has been experiencing strong loan growth, particularly in commercial real estate and construction, contributing to net interest income growth. This trend, if sustained, could positively impact UMB's revenue and earnings growth prospects.
  
• UMB's solid credit metrics, with low net charge-offs and non-performing loans, indicate a strong asset quality. This operational strength might lead to lower provisions for credit losses in the future, supporting margin expansion and profitability.
  
• The increase in average card balances and loan production, particularly from the newly acquired co-branded card portfolio, suggests potential for higher service charges and fee income, positively affecting net revenue and earnings.
  
• UMB's focus on maintaining a strong diversified funding profile and the intentional reduction of high-cost brokered CD balances, combined with expected seasonal deposit growth, could enhance net interest margins and improve overall financial health, positively impacting stock value.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming UMB Financial's revenue will grow by 28.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.5% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $809.8 million (and earnings per share of $10.9) by about August 2027, up from $379.1 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 8.4x on those 2027 earnings, down from 13.2x today. This future PE is lower than the current PE for the US Banks industry at 11.7x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The pending acquisition of Heartland Financial introduces integration risks which, if not smoothly managed, could impact UMB Financial's operational efficiency and, indirectly, its profitability.
  
• A significant reliance on heavy depositor inflows from areas such as institutional deposits raises concerns about the sustainability of low-cost funding sources, potentially affecting net interest margins.
  
• Changes in consumer behavior or regulatory developments affecting the health care sector, crucial for UMB's bank card fee income, could result in reduced revenues from this stream.
  
• The forward-looking statements regarding expected synergy gains, costs, and benefits from the Heartland Financial acquisition could fail to materialize as projected, negatively impacting future earnings.
  
• Interest rate fluctuations and the Federal Reserve's policy changes could adversely affect net interest income, especially given the bank's expectation of maintaining a relatively stable net interest margin amidst potential rate cuts.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $115.83 for UMB Financial based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.1 billion, earnings will come to $809.8 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $102.9, the analyst's price target of $115.83 is 11.2% 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.