Summary
- Management expects the disruption caused by the Truist merger to create opportunity for loan growth.
- Earnings are expected to increase in 2020 on the back of expansion in loan portfolio and fall in non-interest expenses.
- Assuming dividends are maintained at their current level, AUB is offering a modest dividend yield of 2.8%.
- Estimated target price shows there is potential for capital appreciation.
Atlantic Union Bankshares Corporation’s (AUB) earnings are expected to continue to increase in 2020 chiefly on the back of loan growth. This increase in AUB’s loan portfolio is partly attributable to opportunities that have arisen from the Truist merger and the resultant disruption in the industry.
Absence of merger related expenses is also expected to lead to higher earnings this year compared to 2019. I have arrived at a target price of $39.1 for AUB, which suggests an 11% upside from the current market price. Hence, I’m adopting a ‘bullish’ rating on the stock (previous rating on AUB was ‘neutral’). While my new target price is little changed, I’m upgrading to a bullish rating because the stock price dip this year has created room for potential capital appreciation.
Management Looking to Seize Opportunities Created by Truist Merger
As mentioned in the fourth quarter conference call, management sees great opportunity in the Truist merger (SunTrust and BB&T) that was completed in December 2019. AUB hired 39 people from the Truist Companies in a variety of roles during 2019 that can help boost AUB’s loan portfolio in this year and the next. The company also hopes to capture some of SunTrust and BB&T’s customers that may be willing to move following the merger. Partly due to the disruption caused by the merger, the management is targeting to achieve loan growth of 6% to 8% in 2020.
I’m expecting low interest rates to also encourage credit off-take in AUB’s market, thereby driving loan growth for the company. In addition, Virginia’s economy appears to be showing signs of resilience, which will keep loan growth afloat. The state’s leading index was last reported at 1.17%, suggesting that its economy will grow modestly in the coming quarters. As a result, I’m expecting AUB’s net loans to grow by 7.2% year over year in 2020 and 2021. The table below shows my estimates for net loans and other key balance sheet items.
AUB has historically relied on mergers and acquisitions to grow its balance sheet. As the company has not announced any upcoming acquisitions, I have assumed that the loan portfolio will grow only organically in 2020 and 2021.
As can be inferred from the table above, I’m expecting deposits to grow more or less in tandem with loan growth. I’m expecting the loan-to-deposit ratio to be around 96% in 2020 and 2021, which is slightly higher than management’s target ratio of 95%.
