CVB Financial Stock: Earnings Growth Prospects Seem Embedded

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Earnings of CVB Financial Corp. (NASDAQ: CVBF) will benefit significantly from rising interest rates because the cost of deposits is very rigid. Additionally, economic activity in California will likely support loan growth, which will provide some support to the bottom. line. Overall, I expect CVB Financial to report earnings of $1.58 per share for 2022, up 1% year-over-year. For 2023, I expect earnings to grow 23% to $1.93 per share. The year-end target price suggests a significant decline from the current market price. Based on the expected total return, I adopt a holding rating on CVB Financial.

Deposit fees will not be affected by rising interest rates

The cost of CVB Financial Corp deposits is very rigid because the deposit book is heavy with non-interest bearing deposits. These deposits represented 63% of total deposits at the end of June 2022. It is therefore not surprising that the costs of deposits increased by only one basis point during the second quarter of the year, the rate of funds feds having increased by 125 basis points. . During the last rate hike cycle, deposit fees also remained fairly stable. Management mentioned on the last conference call that the cost of funds only increased by eight basis points over the last rate cycle when short-term rates increased by 225 basis points.

During this time, loans will take some time to revalue due to the presence of some fixed rate loans. The results of management’s interest rate sensitivity analysis presented in File 10-Q show that a 200 basis point increase in interest rates can increase net interest income by 5.46 % the first year and 9.93% the first two years. of rising rates.

Sensitivity to interest rates

Filing 2Q 2022 10-Q

Given these factors, I expect the margin to increase by 25 basis points in the second half of 2022 and 30 basis points in 2023.

The California economy will play a key role in loan growth

CVB Financial Corp’s loan portfolio grew 1.1% during the second quarter of 2022, bringing first-half loan growth to 10.1%. The growth in the first half of the year is mainly attributable to the acquisition of Suncrest Bank. The company has historically relied on acquisitions for growth. These acquisitions concern not only entire banks, but also banking teams. Aside from gained growth, CVB Financial Corp’s loan growth remained lackluster. I expect organic growth to remain weak in the coming quarters.

High borrowing costs will further hurt the outlook for loan growth. On the other hand, the strength in economic activity bodes well for demand for credit in CVB Financial Corp’s markets. The company has locations throughout California, with the majority clustered in Los Angeles. As shown below, the trend line for California’s coincident economic activity index is now steeper than before the pandemic.

California Coincident Index of Economic Activity

Federal Reserve Bank of Philadelphia

A rising tide can lift all boats. Therefore, I believe the rapidly improving economic activity in California may support CVB Financial Corp’s loan growth, even though management has not always been successful in achieving organic growth.

Overall, I expect loan growth to fall from the second quarter level to 0.75% each quarter through the end of 2023.

Earnings are expected to be flat this year before surging next year

Expected margin expansion will be the main driver of earnings over the next year and a half. Weak loan growth will likely provide further support to the bottom line.

On the other hand, the provisioning will probably be a little high since it was exceptionally high during the first half of the year. Non-performing loans represented 0.21% while provisions represented 0.92% of total loans at the end of June 2022. As a result, I am satisfied with the existing reserves against the credit risk of the portfolio. In addition, management uses GDP, the unemployment rate and the price of commercial real estate in the index to determine its provisioning for expected loan losses, as mentioned in the last earnings presentation. As the market’s view on GDP and the unemployment rate has not changed much this quarter, I do not expect these economic variables to significantly increase the provisions. Instead, I expect loan additions to be the main driver of provisioning through the end of 2023. Overall, I expect provisioning to decline from the level of the second quarter, but remains above average.

Given these factors, I expect CVB Financial Corp. reports earnings of $1.58 per share for 2022, up just 1% year-over-year. For 2023, I expect earnings to grow 23% to $1.93 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 349 436 416 415 493 575
Allowance for loan losses 2 5 24 (26) 11 ten
Non-interest income 43 59 50 47 51 51
Non-interest charges 180 199 193 190 222 232
Net income – Common Sh. 152 207 177 212 223 271
BPA – Diluted ($) 1.24 1.48 1h30 1.56 1.58 1.93

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 deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Book value of equity will suffer from high interest rates

CVB Financial has a large balance of available-for-sale (“AFS”) securities, which represented 24% of total earning assets at the end of June 2022. As interest rates rise, the market value AFS fixed rate securities will increase. decline leading to unrealized losses. These losses will skip the income statement and go directly to the equity book value account. Due to unrealized losses accumulated in the first half of the year, the tangible book value per share has already fallen from $10.3 at the end of December 2021 to $8.5 at the end of June 2022.

Further erosion is likely in the coming quarters as the Federal Reserve forecasts another 125-150 basis point hike in the federal funds rate through the end of 2023. On the other hand, retained earnings will increase the book value of equity. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 7,701 7,496 8,255 7,823 8,742 9,007
Net loan growth 61.4% (2.7)% 10.1% (5.2)% 11.7% 3.0%
Other productive assets 2,506 2,445 4,857 6,778 6,668 6,871
Deposits 8,827 8,705 11,737 12,976 14,284 14,717
Loans and sub-debts 768 477 530 695 592 610
Common Equity 1,851 1994 2008 2,082 2,045 2,204
Book value per share ($) 15.2 14.3 14.7 15.4 14.6 15.7
Tangible BVPS ($) 9.3 9.2 9.6 10.3 9.0 10.1

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Adopt a note of expectation

CVB Financial offers a dividend yield of 3.1% at the current quarterly dividend rate of $0.20 per share. Earnings and dividend estimates suggest a payout ratio of 41% for 2022, which is below the five-year average of 51%. There is therefore room for an increase in the dividend. To be on the safe side, I assume there will be no change in the level of dividends for my investment thesis.

I use historical price/book tangible (“P/TB”) and price/earnings (“P/E”) multiples to value CVB Financial. The stock has traded at an average P/TB ratio of 2.20x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 9.3 9.2 9.6 10.3
Average market price ($) 23.0 21.3 19.0 20.9
Historical P/TB 2.48x 2.32x 1.97x 2.03x 2.20x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $9.0 yields a target price of $19.7 for the end of 2022. This price target implies a decline of 24.4% compared to the closing price on October 7. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 2.00x 2.10x 2.20x 2.30x 2.40x
TBVPS – Dec 2022 ($) 9.0 9.0 9.0 9.0 9.0
Target price ($) 17.9 18.8 19.7 20.6 21.5
Market price ($) 26.1 26.1 26.1 26.1 26.1
Up/(down) (31.3)% (27.9)% (24.4)% (21.0)% (17.6)%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 15.2x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 1.24 1.48 1h30 1.56
Average market price ($) 23.0 21.3 19.0 20.9
Historical PER 18.5x 14.4x 14.6x 13.4x 15.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.58 yields a price target of $24.0 for the end of 2022. This price target implies a decline of 7.8% from at the closing price on October 7. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 13.2x 14.2x 15.2x 16.2x 17.2x
EPS 2022 ($) 1.58 1.58 1.58 1.58 1.58
Target price ($) 20.9 22.4 24.0 25.6 27.2
Market price ($) 26.1 26.1 26.1 26.1 26.1
Up/(down) (19.9)% (13.9)% (7.8)% (1.7)% 4.3%
Source: Author’s estimates

Equal weighting of the target prices from the two valuation methods yields a combined target price of $21.9, implying a 16.1% decline from the current market price. Adding the forward dividend yield gives an expected total return of minus 13.0%. Given the expected total return, I believe a holding rating is appropriate for CVB Financial Corp.

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