Home Bancorp: Earnings Growth Likely Due To Loan Expansion, Credit Cost Normalization
Summary
- The vaccine rollout and consequent pickup in economic activity in Louisiana and Mississippi will likely drive credit demand.
- The loan loss reserve is already high enough to cover potential loan impairments in the year ahead. As a result, the provision expense will likely return to the pre-pandemic level.
- The year-end target price suggests a high upside from the current market price. Additionally, Home Bancorp is offering a modest dividend yield.
Earnings of Home Bancorp, Inc. (NASDAQ: NASDAQ:HBCP) will likely trend upwards this year mostly due to the vaccine-driven improvement in credit demand. Further, the provision expense will likely return to a pre-pandemic level as Home Bancorp has already built up a large level of allowances that can withstand potential pandemic-driven losses in the year ahead.
However, the portfolio is still facing above-average credit risk because of exposure to certain high-risk industries, including hotels and restaurants. Overall, I'm expecting the company to report earnings of $3.63 per share in 2021, up 27% year over year. The December 2021 target price suggests a high upside from the current market price. As a result, I'm adopting a bullish rating on Home Bancorp.
Vaccine Rollout, PPP Forgiveness, Deposit Maturity to Drive Net Interest Income
The vaccine rollout and economic reopening will likely drive demand for credit in the year ahead. Home Bancorp operates in the states of Louisiana and Mississippi. While Louisiana's vaccination rollout is so far at par with other states, Mississippi has been lagging. According to data maintained by John Hopkins, around 19.27% of Louisiana's population is fully vaccinated, as opposed to 16.59% of Mississippi's population.
The economy of the two states has considerably improved, as signaled by the unemployment rate. The following chart compares the unemployment rates for Louisiana, Mississippi, and the United States.
The upcoming forgiveness of Paycheck Protection Program ("PPP") loans will likely constrain the loan growth. As mentioned in the fourth quarter's earnings release, PPP loans made up 11.2% of total loans. Home Bancorp's participation in the new PPP round will likely cut down the impact of loan forgiveness on the loan portfolio size. The new PPP round is almost half in size compared to last year's PPP rounds; therefore, the net impact of PPP on loan portfolio size will be negative.
Considering the economic factors and PPP, I'm expecting the loan portfolio to increase by 1% by the end of 2021 from the end of 2020. The following table shows my estimates for loans and other balance sheet items.
The PPP forgiveness will likely add $5.4 million of unrecognized PPP lender fees to the net interest income, as mentioned in the earnings release. Additionally, the net interest income will likely benefit from the maturity of certificates of deposits ("CD"). According to details given in the 10-K filing for 2020, CDs totaling $172 million will mature in 2021, representing 7.8% of total deposits. As mentioned in the earnings release, the CD book carried a weighted average rate of 1.08% in the fourth quarter of 2020. Assuming Home Bancorp can replace the maturing CDs with deposits carrying rates that are 50 basis points lower, the maturity will likely reduce the deposit cost by 4 basis points.
On the other hand, the upcoming maturities of loans will likely pressurize the average portfolio yield, thereby reducing the net interest income. According to details given in the 10-K filing, loans totaling $382 million will mature in 2021, representing 19% of total loans. The reinvestment of cash flows from these maturing loans at lower rates will reduce the average portfolio yield.
Considering the impact of maturing CDs and loans, I'm expecting the average net interest margin in 2021 to be 3 basis points below the average for 2020. Based on the outlook for net interest margin, PPP, and the loan portfolio, I'm expecting the net interest income to increase by 4% year over year in 2021.
High Allowance Level to Cover Potential Loan Impairments
Home Bancorp's existing allowances are high enough to withstand potential losses this year without further out-of-the-ordinary provisioning. Allowances made up 1.66% of total loans at the end of 2020, while net charge-offs made up just 0.12% of average loans last year, according to details given in the 10-K filing. As a result, I'm expecting the provision expense to decline this year.
However, the credit risk is not yet back to normal. Loan deferrals made up 2% of total loans at the end of December, according to details given in the earnings release. Moreover, high-risk industries, including hotels and restaurants, made up 21.3% of total loans at the end of 2020, according to details given in the 10-K filing.
Considering the factors mentioned above, I'm expecting the provision expense to return to the pre-pandemic level this year. I'm expecting Home Bancorp to report a provision expense of $4 million in 2021, or 20 basis points of total loans. In 2019, the provision expense made up 18 basis points of total loans, while in 2018, the provision expense made up 24 basis points of total loans.
Expecting earnings of $3.63 per share
The vaccine-driven loan growth will likely boost earnings this year. Further, the return of provision expense to the pre-pandemic level will boost the bottom line. On the other hand, gains on sales of loans will likely return to a more normal level this year, which will restrain earnings growth. Overall, I'm expecting the company to report earnings of $3.63 per share, up 27% year over year. The following table shows my income statement estimates.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic and new variants. The portfolio's exposure to the hotel and restaurant industries adds to the risks. Further, the future corporate tax rate is uncertain. To be conservative, I have assumed a tax rate of 28% in my earnings estimates for the second half of 2021.
December 2021 Target Price Suggests a Double-Digit Price Upside
Home Bancorp is offering a modest dividend yield of 2.4%, assuming the company maintains its quarterly dividend at the current level of $0.22 per share. The earnings and dividend estimates suggest a payout ratio of just 24% for 2021, which means there is room for a dividend hike. To be cautious, I'm not anticipating any change in the dividend level this year.
I'm using the historical price-to-tangible book ("P/TB") and the historical price-to-earnings ("P/E") multiples to value Home Bancorp.
The stock has traded at an average P/TB ratio of 1.31 in the past, as shown below.
Multiplying the average P/TB multiple with the forecast tangible book value per share of $33.2 gives a target price of $43.5 for the end of 2021. This price target implies a 17.6% upside from the April 8 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
The stock has traded at an average P/E ratio of around 11.4x in the past, as shown below.
Multiplying the average P/E multiple with the forecast earnings per share of $3.63 gives a target price of $41.5 for the end of 2021. This price target implies a 12.1% upside from the April 8 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
Equally weighting the target prices from the two valuation methods gives a combined target price of $42.5, which implies a 14.9% upside from the current market price. Adding the forward dividend yield gives a total expected return of 17.2%. Based on the high expected return, I'm adopting a bullish rating on Home Bancorp.
The company's earnings are set to surge this year due to the normalization of the provision expense and low loan growth. Further, Home Bancorp is trading at an attractive level that suggests a decent upside to the year-end target price.
This article was written by
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Comments (1)
Am buying
HOPE I already have
HOME I'll purchase today
Thinkew