Northwest Bancshares stock: Earnings will fall (NASDAQ:NWBI)

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Profit of Northwest Bancshares, Inc. (NASDAQ: NWBI) will most likely decrease this year due to the normalization of provisions. On the other hand, a slight expansion in margins will likely support the bottom line. Additionally, I expect the loan portfolio trend to finally recover after six consecutive quarters of decline. Overall, I expect Northwest Bancshares to post earnings of $0.85 per share in 2022, down 29.5% year-over-year. The year-end target price suggests a slight upside from the current market price. Therefore, I am now downgrading Northwest Bancshares to a hold rating from my previous buy rating.

The prolonged downward trend in lending should finally reverse

Northwest Bancshares’ loan portfolio declined more than expected in the last quarter of 2021. Total loan balances fell 1.7% at end-December 2021 compared to end-September 2021. Loan portfolio has now declined for the six last consecutive years. quarters, which undermines management capabilities.

There are chances of a turnaround soon due to economic factors. Northwest Bancshares operates in Pennsylvania, New York, Ohio and Indiana. Although these four states are quite close to each other, their economies behave quite differently, as the unemployment rate and GDP data show. Therefore, I believe national averages are more appropriate to gauge demand for Northwest Bancshares products than statewide measures. The country’s unemployment rate is almost back to pre-pandemic levels, according to official sources. Additionally, the Mortgage Bankers Association expects strong GDP growth of around 3.1% this year.

Additionally, pressure from the Paycheck Protection Program (“PPP”) remission is expected to be lower this year compared to last year. Outstanding PPP loans accounted for just 0.7% of total loans at the end of December 2021, according to details given in the 10-K filing.

Given these factors, I expect the downward trend in lending to reverse this year. However, loan growth is likely to remain below the historical average. Overall, I expect the loan portfolio to grow by 2% by the end of December 2022 compared to the end of 2021. In my last report on Northwest Bancshares as well, I forecast growth 2% loans for this year. However, I now expect a lower average loan balance for this year, as the decline in loans in the last quarter of 2021 surprised me, resulting in a lower than expected loan balance for the end of the year.

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

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 7,737 7,996 8,751 10,446 9,914 10 114
Net loan growth 3.2% 3.4% 9.4% 19.4% (5.1)% 2.0%
Other productive assets 834 840 838 1,578 2,317 2,363
Deposits 7,827 7,894 8,592 11,599 12,301 12,549
Loans and sub-debts 219 346 368 457 392 400
Common Equity 1,208 1,258 1,353 1,539 1,584 1,590
Book value per share ($) 11.8 12.2 12.8 12.8 12.5 12.9
Tangible BVPS ($) 8.5 9.0 9.3 9.5 9.4 9.7

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Margin not very sensitive to rate changes

Despite the expected sharp rise in interest rates this year, the margin is unlikely to increase much. The difference in interest rate sensitivity between Northwest Bancshares’ assets and liabilities is not material. The company had $433.5 million more assets than liabilities that could be reassessed within a year, according to details provided in the 10-K filing. To put that number into perspective, $433.5 million is only 3% of total assets.

Management’s interest rate sensitivity analysis presented in File 10-K also shows that net interest income is not very rate sensitive. According to the analysis, a 200 basis point increase in interest rates can increase net interest income by only 1.9% year-over-year.

Provision standardization to drive revenue

I previously expected provision charges to remain below normal for 2022, as mentioned in my last report on Northwest. I have now decided to increase the provision charge estimate as the level of provision is much lower than the level of non-performing loans. Provisions represented 1.02% of total loans, while non-performing loans represented 1.59% of total loans at the end of December 2021. This means that the ratio of provisions to non-performing loans at the end of December 2021 does not was only 64.38%. By comparison, the NPL provision ratio was at a much more comfortable level of 129.99% at end-December 2020.

Weak loan growth will likely be the main driver of provision charges this year. Overall, I expect provision charges to be around 0.25% of total loans in 2022. By comparison, the ratio of provision charges to total loans averaged 0.25% % from 2017 to 2019 and 0.29% for the last five years. years.

Expect earnings to fall to 0.85%

Northwest Bancshares’ earnings will likely decline this year, primarily due to the normalization of provisions. Additionally, non-interest revenue will likely be lower this year due to lower mortgage bank revenue amid rising interest rates. In addition, the gain on the sale of insurance activities recorded in the second quarter of 2021, of approximately $25.3 million, will not be repeated in 2022.

Overall, I expect Northwest Bancshares to post earnings of $0.85 per share in 2022, down 29.5% year-over-year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 331 339 360 392 391 396
Allowance for loan losses 20 20 23 84 (12) 26
Non-interest income 110 92 99 132 143 111
Non-interest charges 286 276 296 347 345 341
Net income – Common Sh. 94 105 110 75 153 105
BPA – Diluted ($) 0.92 1.02 1.04 0.62 1.21 0.85

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last report on Northwest Bancshares, I estimated earnings of $0.87 per share for 2022. I have lowered my earnings estimate slightly as I have increased my estimate for provisioning expense as shown above . Additionally, the loan portfolio declined more than expected in the last quarter of 2021. As the December 2021 year-end loan balance is lower than I expected, the average loan balance for 2022 is now going to be lower than I had previously anticipated. .

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate increases.

Downgrade to a sustain note

Northwest Bancshares offers a dividend yield of 6.0% at the current quarterly dividend rate of $0.20 per share. Earnings and dividend estimates suggest a payout ratio of 94% for 2022. Northwest Bancshares’ payout ratio was above 100% in 2020 and 2016. Therefore, I believe a dividend cut is unlikely to this stage despite the high payout ratio. Nevertheless, investors, especially those with a low tolerance for risk, should remain cautious.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Northwest Banc shares. The stock has traded at an average P/TB ratio of 1.51 in the past, as shown below.

FY19 FY20 FY21 Average
T. Book value per share ($) 9.3 9.5 9.4
Average market price ($) 17.1 11.5 13.8
Historical P/TB 1.84x 1.22x 1.47x 1.51x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $9.7 yields a price target of $14.6 for the end of 2022. This price target implies an upside of 9.7% compared to the closing price on March 23. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.41x 1.46x 1.51x 1.56x 1.61x
TBVPS – Dec 2022 ($) 9.7 9.7 9.7 9.7 9.7
Target price ($) 13.7 14.1 14.6 15.1 15.6
Market price ($) 13.3 13.3 13.3 13.3 13.3
Up/(down) 2.4% 6.1% 9.7% 13.4% 17.0%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 17.0x in the past, as shown below.

FY19 FY20 FY21 Average
Earnings per share ($) 1.04 0.62 0.85
Average market price ($) 17.1 11.5 13.8
Historical PER 16.4x 18.5x 16.2x 17.0x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $0.85 yields a price target of $14.5 for the end of 2022. This price target implies an upside of 8.7% over at the closing price on March 23. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 15.0x 16.0x 17.0x 18.0x 19.0x
EPS 2022 ($) 0.85 0.85 0.85 0.85 0.85
Target price ($) 12.8 13.6 14.5 15.3 16.2
Market price ($) 13.3 13.3 13.3 13.3 13.3
Up/(down) (4.1)% 2.3% 8.7% 15.1% 21.5%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $14.6, implying a 9.2% upside from the current market price. Adding the forward dividend yield gives an expected total return of 15.2%.

Compared to my last report on Northwest Bancshares, I reduced my target price for two main reasons.

  1. I have reduced my income estimate for 2022.
  2. To calculate the historical P/TB and P/E multiples, I advanced the years used to 2019-2021 from 2018-2020. Therefore, these multiples are now lower than before.

Based on the limited price upside, I am now downgrading Northwest Bancshares shares to a hold rating from my previous buy rating.

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