Aiming Tan
Prosperity Bancshares, Inc. earnings (New York Stock Exchange: PB) are most likely to continue their upward trend this year on the back of moderate loan growth. Additionally, recent improvements in the deposit mix will help margins grow further in the coming quarters. interest rates rise. Overall, Prosperity Bancshares expects his 2022 earnings to be $5.72 per share, up 2%, and in 2023 he expects to be $6.05 per share, up 6% over the previous year.compared to me last report For the company, we slightly raised our 2022 earnings forecast. This is primarily due to the increased margin estimates. The December 2023 target price suggests a modest upside from current market prices. It maintains a Hold rating with Prosperity Bancshares based on total expected returns.
Improving deposit mix bodes well for margins
Prosperity Bancshares net interest margin increased 14 basis points in Q3 2022 after increasing 9 basis points in Q2 2022. Interest-free deposits increased from 36.9% at end-June 2021 and 34.9% at end-December 2021 to 38.1% of total deposits by end-September. .
Unfortunately, Prosperity Bancshares has a very large portfolio of securities, most of which have fixed interest rates, which limits the average yield on their earning assets. At the end of September 2022, securities represented 45% of total earning assets.
On the positive side, as mentioned in the earnings presentation, floating rate and variable rate loans accounted for 57.9% of total loans. These loans will help margins continue to expand in the coming quarters. Taking these factors into account, we expect net interest margin to increase by 5 basis points in the fourth quarter of 2022 and by 10 basis points in 2023. Compared to our previous report on Prosperity Bancshares, published in August 2022, our upward revision to margin estimates is primarily due to recent improvements in deposit composition. Moreover, the Federal Fund rate hike in the second half of 2022 has exceeded my previous expectations in my previous report on the company.
Loan growth likely to be lackluster
After a strong performance in Q2, loan growth appeared to lose steam in Q3 of 2022. The portfolio grew just 0.1% during the quarter, lower than my expectations.
The outlook isn’t too bright because of the mortgage. As mentioned in the presentation, as of the end of September 2022, mortgages for 1-4 families accounted for 29.4% of total loans, and home equity credit lines accounted for his 5.1% of total loans. rice field. Mortgages rely heavily on borrowing costs as borrowers in this segment can wait for more feasible times. As you can see below, 15-year mortgage rates are currently at their highest level in a decade, which is sure to hurt demand for mortgages.
Additionally, the Mortgage Bankers Association expects mortgage purchases to decline by 8% year-over-year in 2023.
On the positive side, a strong labor market continues to support commercial loan growth. Prosperity Bancshares has operations in Texas and Oklahoma, both of which currently have strong job markets compared to their respective histories.
Taking these factors into account, we expect our loan portfolio to grow by 0.5% in the fourth quarter of 2022, for full-year loan growth of -0.1%. In 2023, we expect our loan portfolio to grow by 3%. Compared to my previous report on Prosperity Bancshares, I have lowered my loan growth estimates for the fourth quarter and full year of 2023 due to the disappointing performance in the third quarter.
On the other hand, we expect deposits to grow in line with lending. However, the presence of large securities balances undermines equity growth. As interest rates rise, the market value of fixed-rate securities declines, resulting in write-downs. In accordance with the relevant accounting standards, these losses skip the income statement and erode the equity balance through other comprehensive income. Equity book values ​​will therefore face continued pressure in the coming quarters due to the ongoing rate hike cycle. The following table shows my balance sheet estimates.
| financial position | FY18 | FY19 | 2020 | 21st year | FY22E | FY23E |
| net loan | 10,284 | 18,758 | 19,931 | 18,330 | 18,315 | 18,871 |
| net lending growth | 3.5% | 82.4% | 6.3% | (8.0)% | (0.1)% | 3.0% |
| Other earning assets | 9,439 | 8,571 | 8,590 | 12,826 | 14,884 | 15,488 |
| deposit | 17,257 | 24,200 | 27,360 | 30,772 | 29,447 | 30,340 |
| Borrowings and Subdebt | 1,316 | 1,807 | 390 | 449 | 1,627 | 1,660 |
| common stock | 4,053 | 5,971 | 6,131 | 6,427 | 6,546 | 6,746 |
| Book value per share ($) | 58.1 | 81.2 | 65.9 | 69.7 | 71.8 | 74.0 |
| Tangible BVPS ($) | 30.4 | 36.2 | 30.4 | 34.0 | 35.8 | 37.9 |
| Source: SEC filings, authors’ estimates (in millions of US dollars unless otherwise specified) | ||||||
Providing normalization to limit profit growth
Property Bancshares surprised me by reporting zero net provisioning costs in the third quarter. The company has now reported zero provisioning for the past eight consecutive quarters. As I said in my last report, I don’t think this trend can be sustained for long as borrowers are under stress. Stressors include a possible recession and a high inflation environment. As a result, in the fourth quarter of 2022 and he expects provisions to return to normal levels in the full year of 2023. We expect our 2023 net provision cost to be approximately 0.09% of total loans. Same as average for last 5 years.
Expected loan growth and widening margins undermine the effects of normalization of provisioning. Overall, we expect Prosperity Bancshares to earn his 2022 earnings of $5.72 per share, up 2% year over year. In 2023, the company expects earnings to grow 6% to $6.05 per share. The following table shows my income statement estimates.
| Profit and loss statement | FY18 | FY19 | 2020 | 21st year | FY22E | FY23E |
| net interest income | 630 | 696 | 1,031 people | 993 | 1,014 | 1,081 |
| Bad debt allowance | 16 | Four | 20 | – | Four | 17 |
| non-interest income | 116 | 124 | 132 | 140 | 142 | 141 |
| non-interest expenses | 326 | 397 | 497 | 474 | 488 | 497 |
| Net profit – Ordinary Sh. | 322 | 333 | 529 | 519 | 521 | 552 |
| EPS – diluted ($) | 4.61 | 4.52 | 5.68 | 5.60 | 5.72 | 6.05 |
| Source: SEC filings, authors’ estimates (in millions of US dollars unless otherwise specified) | ||||||
In my previous report on Prosperity Bancshares, I estimated earnings per share in 2022 at $5.64.
My estimates are based on certain macroeconomic assumptions that may not materialize. Therefore, your actual earnings may differ significantly from my estimates.
Maintain hold rating
Prosperity Bancshares has a long-standing tradition of increasing its dividend in the last quarter of the year. Given its earnings outlook, the company is likely to maintain its dividend trend this year. Therefore, in the fourth quarter of 2023, the company expects he will increase its dividend by $0.02 per share to $0.57 per share. 35% annual average. Based on my dividend forecast, Prosperity Bancshares futures dividend yield is 3.1%.
We use historical price-to-tangible assets (“P/TB”) and price-to-earnings (“P/E”) multiples to value Prosperity Bancshares. The stock has historically traded at an average P/TB ratio of 2.11, as shown below.
| FY19 | 2020 | 21st year | average | |||
| T. Book value per share ($) | 31.1 | 30.4 | 34.0 | |||
| Average Market Price ($) | 69.6 | 59.7 | 72.7 | |||
| Past P/TB | 2.24 times | 1.96 times | 2.14 times | 2.11 times | ||
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple by the projected tangible book value of $37.9 per share yields a target price of $80.2 at the end of 2023. This price target represents a 10.7% increase from the January 5 closing price. The following table shows the target price sensitivity to the P/TB ratio.
| P/TB multiple | 1.91 times | 2.01 times | 2.11 times | 2.21 times | 2.31 times |
| TBVPS – December 2023 ($) | 37.9 | 37.9 | 37.9 | 37.9 | 37.9 |
| Target price ($) | 72.6 | 76.4 | 80.2 | 84.0 | 87.8 |
| Market price ($) | 72.4 | 72.4 | 72.4 | 72.4 | 72.4 |
| Upside/(Downside) | 0.2% | 5.5% | 10.7% | 15.9% | 21.2% |
| Source: Author’s estimate |
As you can see below, the stock has historically traded at an average P/E of around 13.0x.
| FY19 | 2020 | 21st year | average | |||
| Earnings Per Share ($) | 4.52 | 5.68 | 5.60 | |||
| Average Market Price ($) | 69.6 | 59.7 | 72.7 | |||
| Past PER | 15.4 times | 10.5 times | 13.0x | 13.0x | ||
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple by the projected earnings per share of $6.05 yields a target price of $78.4 at the end of 2023. This target price represents an 8.2% increase from the January 5 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| PER Multiple | 11.0x | 12.0x | 13.0x | 14.0x | 15.0x |
| EPS 2023 ($) | 6.05 | 6.05 | 6.05 | 6.05 | 6.05 |
| Target price ($) | 66.3 | 72.3 | 78.4 | 84.4 | 90.5 |
| Market price ($) | 72.4 | 72.4 | 72.4 | 72.4 | 72.4 |
| Upside/(Downside) | (8.5)% | (0.1)% | 8.2% | 16.6% | 24.9% |
| Source: Author’s estimate |
Equally weighting the target prices from the two valuation methods yields a total Target price $79.3, which represents a 9.5% increase from the current market price. Adding future dividend yields gives a total expected return of 12.5%. This expected return is not high enough for me. Therefore, I maintain my hold rating on Prosperity Bancshares.
