BankUnited: Earnings Likely To Stabilize At Current Level

Summary

• The economic slowdown, uncertainty, and high customer liquidity will likely pressurize loan growth next year.
• The provision expense will likely decline because the existing loan loss reserves already incorporate quite a stressed economic outlook.
• The target price for next year suggests a limited upside from the current market price; hence, I’m adopting a neutral rating on BKU.

Earnings of BankUnited, Inc. (NYSE: NYSE:BKU) dipped in the third quarter to $0.70 per share from $0.80 per share in the second quarter of 2020. A small decline in the loan balance, margin compression, and higher provision expense contributed to the earnings decline. Earnings are likely to stabilize at the third quarter’s level in the coming quarters. I’m expecting the provision expense to trend downwards, which will offset the impact of loan decline in the fourth quarter of 2020. For 2021, I’m expecting loan growth to remain below normal because of headwinds in the commercial loan segment. Overall, I’m expecting BKU to report earnings of around $2.69 per share in 2021. The June 2021 target price suggests a limited upside from the current market price; hence, I’m adopting a neutral rating on BKU.

Lending Opportunity to Remain Muted Next Year

BKU’s loans declined by 0.3% quarter over quarter in the third quarter partly due to runoff in the New York multifamily portfolio and Pinnacle Bridge Funding Group’s franchise and equipment financing advances, as mentioned in the third quarter’s conference call. I’m expecting the loan balance to decline further in the fourth quarter because BKU’s major loan segment, Commercial Loans, will continue to face headwinds caused by the pandemic. The only loan segment that is currently performing well in the banking industry is Residential Mortgage, which made up a quarter of total loans at the end of September 2020. The majority of BKU’s loans are in the Commercial segment, which is likely to suffer from the economic slowdown and the uncertainty caused by the pandemic.

Moreover, as is evident from the recent surge in deposits, BKU’s customers are holding a lot of liquidity to stay safe amid the pandemic. Consequently, they have a limited need to borrow from BKU. Furthermore, the management expects most of the Paycheck

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.