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Cullen/Frost Bankers Inc (CFR)
To arrive at our $74 price objective, we employed a three-factor valuation methodology that incorporates target P/E, target P/TBV and a DCF model. For our P/E valuation, we apply a 15x earnings multiple on CFR's 2017E core earnings. For our P/TBV valuation, we apply a 1.7x tangible book multiple to CFR's 2017E tangible book. Both multiples are lower than peers for CFR due to EPS headwinds and rising credit costs from lower energy prices. For our DCF analysis, we use a net income growth of 3.0% and assume a beta of 1.0 in the terminal stage.
Upside risks to our PO: a sharp rebound in oil prices, higher than expected interest rates, stronger loan growth, better than expected credit performance of CFR's energy loan portfolio. Downside risks: A worse than expected decline in Texas economic growth that impacts CFR's balance sheet growth, a slower than expected pace or rate hikes and a worse than expected sell off in oil prices.
East West Bancorp, Incorporated (EWBC)
Our three-pronged valuation methodology (target P/E, target P/TBV, and DCF analysis) drives our price objective of $50. We assumes a 16.0x P/ 2017e EPS and a target P/TBV of 2.0x to 2Q17E tangible book given our forecast above peer EPS growth. Our DCF assumes a two-stage cost of capital of 9.5% and a terminal growth rate of 3% Upside risks to our PO are a quick economic recovery (led by stabilization or appreciation in CA housing values) or a faster than expected recovery in China. Downside risk to our PO is an even deeper economic slowdown driving corporate losses higher than we currently anticipate, faster than expected normalization in credit.
Eaton Vance (EV)
Our $35 price objective is based on a target P/E of 15x calendar 2016E (14x '17E), at a discount to our asset-manager group target multiple, given recent outflows from high fee products, offset by distinct products in areas such as floating rate and overlay.
Downside risks to our price objective are market depreciation and investment under-performance, as for all asset managers, and (should the economy slow) concentration in some credit areas, such as bank loan funds, high yield and longer-duration munis. Upside risks are improving performance, flows, or future traction from EV's ETF licensing initiative.
FCB Financial Holdings, Inc (FCB)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $44 price objective and assign a 1.6x multiple to our 2017E TBV given that we believe the market would pay a 0.3x premium for FCB's 2016 estimated returns in line with the median premium of its peer group (Florida banks, High Growth, Bank Acquisition, and SMIDs). We place a 18x multiple on our 2017E EPS, a premium to its SMIDs peers given our outlook for stronger EPS growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%.
Downside risks to our price objective are a deterioration in credit quality in FCB's unseasoned newly originated loan portfolio, a downturn in the Florida economy, and continued competition for C&I loans. Upside risks are a better than expected improvement in its return profile and a much stronger economic improvement in the Florida economy.
Fifth Third Bank (FITB)
Our PO of $26 is predicated on target P/E multiple of 15x to reflect higher confidence in FITB achieving most of its profit improvement goals related to Project North Star. This represents a modest premium versus peers. Downside risks to our PO are a prolonged low interest rate environment, expensive M&A and slower than guided loan growth on weaker economic activity.
Bank of America
Merrill Lynch
2016 Future of Financials Conference | 17 November 2016 67
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