Bankwell Financial: strong loan growth to boost bottom line (NASDAQ: BWFG)

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Profit from Bankwell Financial Group, Inc. (NASDAQ: BWFG) will most likely continue its upward trend on the back of increased loan growth. Robust pipelines, digital innovation and a strong regional economy will likely drive loan growth. During this time, the margin will likely be remain stable in the last three quarters of 2022 as the balance sheet is slightly sensitive to liabilities. Additionally, provisioning will likely remain at a normal level. Overall, I expect Bankwell Financial to report earnings of $4.07 per share for 2022, up 21% year-over-year. The year-end target price suggests a strong upside from the current market price. Therefore, I adopt a buy rating on Bankwell Financial Group.

Internal and external factors to sustain loan growth momentum

Similar to 2021, loan growth remained remarkably strong in the first quarter of 2022. The portfolio jumped 4.8% in the quarter, or 19.1% annualized. Management mentioned in the earnings release that the loan pipeline at the end of the quarter remained as buoyant as it had been in recent quarters. Therefore, loan growth will most likely remain robust through mid-2022.

Additionally, Bankwell Financial invested in a new online banking platform in the second half of 2021, which is expected to bear fruit this year. Additionally, the robust labor market in Bankwell Financial Group’s operating regions bodes well for loan growth. The company operates in the state of Connecticut, where the unemployment rate is worse than the national average but still very good from a historical perspective. As shown below, the unemployment rate is near multi-decade lows.

Chart
Data by YCharts

Approximately 90% of the total loan portfolio is comprised of commercial and industrial (“C&I”) and commercial real estate (“CR”) loans. The purchasing managers’ index is therefore also a good indicator of credit demand. As shown below, the PMI remained comfortably in expansionary territory (above 50), which bodes well for loan growth.

Chart
Data by YCharts

However, loan growth will most likely slow in the latter part of 2022 as rising interest rates weigh on credit demand. Overall, I expect the loan portfolio to grow by 14.5% by the end of 2022 compared to the end of 2021.

Additionally, I expect deposit growth to match loan growth in the last three quarters of 2022. Meanwhile, securities growth will lag loan growth in the last three quarters as growth in deposits and borrowings will primarily fund increased loan growth. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 1,587 1,589 1,602 1,875 2,147
Net loan growth 4.3% 0.1% 0.8% 17.1% 14.5%
Other productive assets 119 101 111 161 144
Deposits 1,502 1,492 1,827 2,124 2,367
Loans and sub-debts 185 175 200 84 90
Common Equity 174 182 177 202 229
Book value per share ($) 22.4 23.4 22.8 26.0 29.7
Tangible BVPS ($) 22.1 23.1 22.5 25.7 29.3

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Loan growth to counter liability sensitivity

Bankwell Financial Group’s balance sheet is liability sensitive as more liabilities than assets are subject to review this year. Interest-bearing transactional deposits, namely Negotiated Withdrawal Order (“NOW”), Money Market and Savings Accounts accounted for 60% of total deposits at the end of March 2022. These deposits will be revalued shortly after each rate. hike. Management’s interest rate sensitivity analysis presented in File 10-Q shows that a 200 basis point increase in interest rates can REDUCE net interest income of 3.0% over twelve months.

On the positive side, strong loan growth will likely drive spread expansion. Management mentioned in the earnings presentation that it originated loans at higher yields than the average yield of the existing portfolio. Yields on new loans will continue to improve over the coming year as rates rise. Therefore, loan additions will increase the margin. Additionally, loan growth will likely crowd out growth in low-yielding assets. This improved asset mix will also boost the margin.

Overall, I expect the net interest margin to remain unchanged in the last three quarters of 2022, compared to 3.30% in the first quarter of the year. Combining loan growth and margin estimates, I expect net interest income to grow 20% year-over-year in 2022. Management mentioned in the press release that ‘It was targeting net interest income growth of 12% to 14%. . In my view, management can easily exceed this target through loan growth.

Normalization of provisions likely

I do not expect the threat of recession or rising interest rates to increase Bankwell Financial Group’s provision charges in the near term. Bankwell is not subject to the outstanding expected credit loss (“CECL”) accounting standard. The bank calculates its level of provision in accordance with the incurred loss model. As a result, I believe that Bankwell Financial will not have to build up its reserves before a possible recession, unlike other banks. Additionally, the interest rate outlook will not require additional provisioning until rates begin to affect credit performance, which I believe will not occur until the last quarter of 2022.

On the other hand, provisioning will likely increase for the existing portfolio and new loan additions. Indeed, the current level of the provision barely covers the credit risk of the portfolio. Non-performing loans represented 0.79% of total loans at the end of March 2022, as mentioned in the presentation of the results. In comparison, provisions represented 0.86% of total loans. As hedging is a little tight, I think Bankwell Financial will need to build up its reserves to reach a more comfortable level.

Overall, I expect the provision charge to be at a normal level this year. I expect net provisioning expense to be 0.12% of total loans in 2022. By comparison, net provisioning expense averaged 0.11% of total loans from 2017 to 2019.

Profits are expected to increase by 21%

Expected loan growth is likely to be the main driver of higher earnings this year. On the other hand, the normalization of provisions will likely limit earnings growth. Meanwhile, the margin will likely remain stable for the rest of the year. Overall, I expect Bankwell Financial to report earnings of $4.07 per share for 2022, up 21% year-over-year. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 56 54 55 68 82
Allowance for loan losses 3 0 8 (0) 2
Non-interest income 4 5 3 6 4
Non-interest charges 36 36 43 40 43
Net income – Common Sh. 17 18 6 26 31
BPA – Diluted ($) 2.21 2.31 0.75 3.36 4.07

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

(In millions of dollars, unless otherwise indicated)

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 recession may increase loan loss provisioning beyond my expectations.

Adopting a buy rating due to a high expected total return

Bankwell Financial offers a dividend yield of 2.5% at the current quarterly dividend rate of $0.20 per share. The current dividend and earnings estimate suggests a payout ratio of 19.6% for 2022, which matches the average of 20% from 2017 to 2019. In addition, Bankwell Financial typically only increases its dividend once times a year. Therefore, another dividend hike is out of the question for this year.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Bankwell Financial. The stock has traded at an average P/TB ratio of 1.14x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 22.1 23.1 22.5 25.7
Average market price ($) 31.5 28.6 18.2 27.8
Historical P/TB 1.43x 1.24x 0.81x 1.08x 1.14x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $29.3 yields a target price of $33.4 for the end of 2022. This price target implies an upside of 6.1% compared to the closing price on July 8. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.94x 1.04x 1.14x 1.24x 1.34x
TBVPS – Dec 2022 ($) 29.3 29.3 29.3 29.3 29.3
Target price ($) 27.6 30.5 33.4 36.3 39.3
Market price ($) 31.5 31.5 31.5 31.5 31.5
Up/(down) (12.6)% (3.3)% 6.1% 15.4% 24.7%
Source: Author’s estimates

As can be seen below, the historical P/E multiple has some anomalies.

Chart
Data by YCharts

Excluding these outliers, Bankwell Financial has traded at an average P/E multiple of 11.6x in the past, as shown below.

EX18 FY19 FY20 FY21 T. Average
Earnings per share ($) 2.21 2.31 0.75 3.36
Average market price ($) 31.5 28.6 18.2 27.8
Historical PER 14.2x 12.4x 24.2x 8.3x 11.6x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the reduced average P/E multiple with the expected earnings per share of $4.07 yields a price target of $47.4 for the end of 2022. This price target implies a 50.3% upside from compared to the closing price on July 8. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 9.6x 10.6x 11.6x 12.6x 13.6x
EPS 2022 ($) 4.07 4.07 4.07 4.07 4.07
Target price ($) 39.2 43.3 47.4 51.4 55.5
Market price ($) 31.5 31.5 31.5 31.5 31.5
Up/(down) 24.4% 37.4% 50.3% 63.2% 76.1%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $40.4, implying a 28.2% upside from the current market price. Adding the forward dividend yield gives an expected total return of 30.7%. Therefore, I adopt a buy rating on Bankwell Financial Group.

About William Moorhead

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