Financial Institutions Faces Profitability Challenges Despite Strengths: Analyst

Stephens analyst Matt Breese initiated coverage on Financial Institutions, Inc. FISI, with an Equal Weight rating and a price target of $20.

The analyst notes that at $6 billion in assets, Financial Institutions has some natural strengths for the current environment, including top 3 market share in 10 of its 14 Upstate NY markets.

The analyst applauds the company's diversified revenues (~20% fees/ revenues), including insurance and wealth management income.

The company's relatively steady NIM outlook, given a diversified loan portfolio, of which 24% is in indirect auto with a shorter duration of ~3 years, is also a tailwind, notes the analyst.

For 2023 and 2024, Breese forecasts operating EPS of $2.94 and $2.94, equaling 0.76% and 0.74% ROA, respectively.

The analyst is concerned about FISI's below-average profitability, with a forecasted 0.74% ROA in 2024 vs. peers at 0.85%-0.90%.

Overall, while the analyst acknowledges FISI's strengths and unusually low valuation, with shares at 75% P/TBV, the analyst remains cautious about the profitability outlook that plays out over the coming quarters.

From a quarterly perspective, the analyst expects EPS to bottom in 1Q24 at $0.65 with expectations for 75bp of Fed Funds cuts in 2024. 

The analyst is modeling ~5% deposit growth in 2023 and 8% in 2024, excluding municipal deposits.

Breese expects a NIM inflection point in 4Q23, bottoming at 2.97% with expansion thereafter to ~3.15% by year-end 2024.

The analyst predicts fee income to remain in the 20%-22% range of total revenues in 2023 and 2024.

Price Action: FISI shares are trading lower by 0.46% to $16.27 on the last check Thursday.