Pinnacle Financial Partners' (NASDAQ:PNFP) loan portfolio is expected to continue to grow at a double-digit rate that will support bottom-line growth this year. The balance sheet growth is expected to push up operating expenses too, which is likely to counter the positive effect of loan growth on earnings. As a result, earnings growth is likely to be almost flat in 2020 over 2019. The estimated target price implies a significant price upside; hence, I'm adopting a bullish rating on PNFP.
PNFP has an impressive track record of growing its balance sheet through acquisitions and aggressive measures aimed at organic growth. Going forward, the management expects to continue to grow its loan portfolio at a low double-digit rate in 2020, as mentioned in the third quarter conference call. Given PNFP's history (shown in the table below), a target of a low double-digit growth rate does not seem difficult to achieve. Apart from acquisitions of loans, I'm expecting PNFP's loan portfolio to also expand because of a low interest rate environment and the natural tapering off of pay-downs and refinancing activity that had gotten triggered by the Fed rate cuts. At the same time, I'm expecting some headwinds from the political uncertainty that is bound to arise as we approach the presidential elections. Consequently, I'm expecting PNFP's net loans to grow by 10.4% in 2020, which is lower than previous years but still quite an impressive growth rate. The following table presents my estimates for PNFP's key balance sheet items.
PNFP's average yield is highly sensitive to interest rates because around 73% of the loan portfolio is linked to Prime and LIBOR. As the majority of PNFP's loan book is variable rate-based, the bulk of the impact of Fed's 2019 rate cuts is expected to be felt in the fourth quarter. Consequently, I'm expecting yields to stabilize by the second quarter of 2020. In addition to the loan book, downside is expected from wholesale bank assets, especially the bond book, as reinvestment of cash flows at lower yields will decrease the average yield on the portfolio. The reduction in yields is expected to pressurize net interest margin, NIM in the fourth quarter of 2019 and first half of 2020.
Some recovery in NIM is expected in the second half of 2020 due to the lagged re-pricing of certificates of deposit, CD. As at the end of September 2019, around 21.5% of PNFP's deposits were CDs, out of which 60% were customer and the rest were wholesale, according to the investor presentation. The wholesale CDs had an average duration of around six months, while the customer book had an average duration of 10 months. Hence, deposit cost is likely to slide down in the mid and the latter half of 2020, which is expected to help improve the NIM.
Based on the re-pricing timing of earning assets and funds, I'm expecting PNFP's NIM to decline by 11bps in the fourth quarter, and then by 2bps in each of the first two quarters of 2020. The following table presents my estimates for PNFP's yields, costs, and NIM.
My estimates are somewhat in line with management's guidance. As mentioned in the conference call, the management expects the NIM to be close to bottoming out in the fourth quarter if there are no further rate cuts in 2020. Please note that in my estimates I too have assumed no Fed rate cuts this year.
The compression in NIM is expected to partly offset the impact of loan growth on net interest income. As a result, I'm expecting PNFP's net interest income to increase by 7% in 2020 compared to 2019.
The management expects full year 2020 efficiency ratio to see flattish growth over 2019, as mentioned in the conference call. I'm slightly more pessimistic than management as I'm expecting the efficiency ratio to worsen to 49.1% in 2020, compared to an estimated 47.7% in 2019. My expectation is based on management's plans to grow the loan portfolio by a double-digit rate in 2020, which will naturally lead to a boost in non-interest expenses. On top of that, inflation will also drive up operating expenses. Consequently, I'm expecting PNFP's non-interest expense to increase by 9% year over year in 2020.
The rise in non-interest expense is expected to partly offset the positive impact of net interest income growth on the bottom line. Overall I'm expecting PNFP's earnings per share to increase very slightly by 1% year over year in 2020.
I'm expecting PNFP to increase its dividends by 12.5% in 2020 to $0.72 per share for the full year, or $0.18 for the quarter. This estimate is based on a payout ratio of 13.2%, which is lower than the ratios PNFP maintained between 2014 to 2017, but above the ratios in 2018 and 2019. The dividend estimate implies a low dividend yield of 1.15%. In addition to the dividend payout, the management can also return capital to investors through the new share buyback program under which $100 million shares are planned to be repurchased.
I'm using the historical price to book value multiple, P/B, to value PNFP. The stock has traded at an average P/B multiple of 1.22 in the past as shown below.
PNFP's book value per share is expected to rise to $61.3 by the end of 2020. This forecast is based on the earnings and dividends estimates as well as the expected impact of around $60 million from the new accounting standard for credit losses. The impact of the accounting standard is based on management's guidance given in the conference call. Multiplying the forecast book value per share with the average P/B multiple gives a December 2020 target price of $74.7. This target price implies a significant price upside of 19.2% from PNFP's January 10 closing price. The following table shows sensitivity of the target price to P/B multiple.
Due to the substantial price upside I'm adopting a bullish rating on PNFP. Based on the potential for capital appreciation the stock appears to be a feasible investment; hence, it is advisable to consider investing in it after conducting further research.
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