Rabbitti
Earnings of Bankwell Financial Group, Inc. (NASDAQ:BWFG) will most probably dip this year due to continued margin contraction and inflationary pressures. On the other hand, moderate loan growth will lift earnings. Overall, I’m expecting Bankwell Financial to report earnings of $4.59 per share for 2023, down 4% year-over-year. Compared to my last report on the company, I’ve slightly reduced my earnings estimate. The year-end target price suggests a high upside from the current market price; therefore, I’m maintaining a buy rating on Bankwell Financial Group. The company mostly appears safe from the current banking crisis.
Reducing the Margin Estimate Following the Deterioration of the Deposit Mix
In my last report on Bankwell Financial, I mentioned that the margin was likely to contract. The margin dipped by a hefty 42 basis points during the last quarter, which was far worse than my expectation. The disappointing performance was mostly attributable to deposit costs, which more than doubled during the quarter. Along with the rising rate environment, the deterioration of the deposit mix also contributed to the surge in deposit costs. Non-interest-bearing deposits dropped to 14.4% of total deposits by the end of December 2022 from 16.6% at the end of September 2022 and 18.8% at the end of December 2021. Further deterioration of the deposit mix cannot be ruled out as depositors will want to chase yields and shift their funds into time deposit products.
The results of the management’s rate-sensitivity analysis showed that at the end of December 2022, a 200-basis points hike in interest rates could decrease the net interest income by 4.8%. The following table from the 10-K Filing shows the results of the rate-sensitivity analysis.
2022 10-K Filing
On the plus side, the anticipated loan additions will lift the margin, as they will originate at higher rates than the portfolio’s average yield. Bankwell Financial was already originating loans at a remarkable rate of 7.23% during the fourth quarter of 2022, as mentioned in the latest presentation. In comparison, the average portfolio yield is much lower at 5.62%, as mentioned in the earnings release. While the high yield on new loans is good news for the margin, it’s bad news for the asset quality. Borrowers having to pay such high yields can easily slide into default when faced with greater financial stress, including a recession or high inflation.
Considering these factors, I’m expecting the margin to dip by 50 basis points in 2023. Compared to my last report, I’ve reduced my margin estimate as the deposit mix is now worse than what I previously estimated.
Fourth Quarter’s Amazing Loan Growth Unlikely to be Repeated
Loan growth for the fourth quarter beat my expectations. The portfolio grew by a massive 16.9% during the quarter, taking the full-year growth to 41%. Loan growth will most probably slow down due to high-interest rates that will discourage borrowers. However, growth is unlikely to fall too low because the economic activity is still not too bad.
The loan portfolio is mostly concentrated in Connecticut, New York, and Florida, with limited exposure to other states including New Jersey, Ohio, and Pennsylvania. Connecticut has a flattish economic activity trendline, but the other two main markets have upward sloping trendlines, which is good news for loan growth.
The Federal Reserve Bank of Philadelphia
Considering these factors, I’m expecting the loan portfolio to grow by 8% in 2023. I’ve reduced my loan growth estimate from the previous estimate given in my last report on the company. However, my average loan balance estimate for 2023 is higher than my previous estimate because loan growth exceeded my expectations in the fourth quarter of 2022.
The following table shows my balance sheet estimates.
| Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net Loans | 1,587 | 1,589 | 1,602 | 1,875 | 2,646 | 2,865 |
| Growth of Net Loans | 4.3% | 0.1% | 0.8% | 17.1% | 41.1% | 8.2% |
| Other Earning Assets | 119 | 101 | 111 | 161 | 132 | 138 |
| Deposits | 1,502 | 1,492 | 1,827 | 2,124 | 2,801 | 3,032 |
| Borrowings and Sub-Debt | 185 | 175 | 200 | 84 | 159 | 165 |
| Common equity | 174 | 182 | 177 | 202 | 238 | 258 |
| Book Value Per Share ($) | 22.4 | 23.4 | 22.8 | 26.0 | 31.2 | 33.8 |
| Tangible BVPS ($) | 22.1 | 23.1 | 22.5 | 25.7 | 30.9 | 33.5 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified) | ||||||
Expecting Earnings to Dip by 4%
The anticipated loan growth discussed above will support earnings this year. On the other hand, the margin contraction will drag earnings. Further, inflation-driven growth in non-interest expenses will lead to an earnings decline. Overall, I’m expecting Bankwell Financial to report earnings of $4.59 per share for 2023, down 4% year-over-year. The following table shows my income statement estimates.
| Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net interest income | 56 | 54 | 55 | 68 | 95 | 104 |
| Provision for loan losses | 3 | 0 | 8 | (0) | 5 | 6 |
| Non-interest income | 4 | 5 | 3 | 6 | 3 | 2 |
| Non-interest expense | 36 | 36 | 43 | 40 | 44 | 54 |
| Net income – Common Sh. | 17 | 18 | 6 | 26 | 37 | 35 |
| EPS – Diluted ($) | 2.21 | 2.31 | 0.75 | 3.36 | 4.79 | 4.59 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified) | ||||||
In my last report on Bankwell Financial Group, I estimated earnings of $4.81 per share. My updated estimate is lower than before because of the tweaks I’ve made in the income statement line items. The tweaks are small, but they combine to make a big difference.
Risks Appear Manageable
Like other banking stocks, Bankwell Financial Group’s stock price plunged last week. In my opinion, the market’s reaction to the recent bank failures seems unreasonable in Bankwell’s case. This is because Bankwell Financial is not like the banks that have failed, as discussed below.
- All three banks in trouble, SVB Financial (SIVB), Signature Bank (SBNY), and Silvergate Capital (SI), had exposure to Californian markets. Their failure can spill over to other banks in the region. Bankwell Financial does not operate in California, so it’s relatively safe.
- Bankwell Financial does not mention exposure to crypto assets or digital tokens in its SEC filings.
- Bankwell Financial’s unrealized losses on the investment portfolio amounted to only $9.2 million at the end of December 2022, as mentioned in the 10-K filing, which is around just 3.9% of total equity. In case Bankwell Financial feels the need to sell securities to pay off some depositors, then the loss it realizes on its securities portfolio won’t be too significant.
However, one area of concern is the total capital level. Bankwell Financial reported a total capital-to-risk weighted asset ratio of 11.39% at the end of December 2022, which is uncomfortably close to the minimum regulatory requirement of 10.5%. In case the current crisis turns systemic and results in credit losses (meaning partner financial institutions are unable to pay interest to Bankwell Financial) then it could erode the company’s equity. This could force the management to cut its dividend in order to meet regulatory requirements. However, I believe the chances of this happening are very low.
Maintaining a Buy Rating
Bankwell Financial is offering a dividend yield of 3.1% at the current quarterly dividend rate of $0.20 per share. The earnings and dividend estimates suggest a payout ratio of 17% for 2023, which is close to the five-year average of 20%. Therefore, I’m not expecting an increase in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Bankwell Financial. The stock has traded at an average P/TB ratio of 0.98 in the past, as shown below.
| FY20 | FY21 | FY22 | Average | |
| T. Book Value per Share ($) | 22.5 | 25.7 | 30.9 | |
| Average Market Price ($) | 18.2 | 27.8 | 32.3 | |
| Historical P/TB | 0.81x | 1.08x | 1.05x | 0.98x |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||
Multiplying the average P/TB multiple with the forecast tangible book value per share of $33.5 gives a target price of $32.8 for the end of 2023. This price target implies a 26.3% upside from the March 17 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 0.78x | 0.88x | 0.98x | 1.08x | 1.18x |
| TBVPS – Dec 2023 ($) | 33.5 | 33.5 | 33.5 | 33.5 | 33.5 |
| Target Price ($) | 26.1 | 29.4 | 32.8 | 36.1 | 39.5 |
| Market Price ($) | 26.0 | 26.0 | 26.0 | 26.0 | 26.0 |
| Upside/(Downside) | 0.5% | 13.4% | 26.3% | 39.2% | 52.1% |
| Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 9.1x in the past, excluding the anomaly in 2020, as shown below.
| FY19 | FY20 | FY21 | FY22 | T. Average | ||
| Earnings per Share ($) | 2.31 | 0.75 | 3.36 | 4.79 | ||
| Average Market Price ($) | 28.6 | 18.2 | 27.8 | 32.3 | ||
| Historical P/E | 12.4x | 24.2x | 8.3x | 6.7x | 9.1x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average trimmed P/E multiple with the forecast earnings per share of $4.59 gives a target price of $41.9 for the end of 2023. This price target implies a 61.4% upside from the March 17 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 7.1x | 8.1x | 9.1x | 10.1x | 11.1x |
| EPS 2023 ($) | 4.59 | 4.59 | 4.59 | 4.59 | 4.59 |
| Target Price ($) | 32.7 | 37.3 | 41.9 | 46.5 | 51.1 |
| Market Price ($) | 26.0 | 26.0 | 26.0 | 26.0 | 26.0 |
| Upside/(Downside) | 26.0% | 43.7% | 61.4% | 79.1% | 96.8% |
| Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $37.4, which implies a 43.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 46.9%. Hence, I’m maintaining a buy rating on Bankwell Financial Group stock.