Citi initiates coverage on South State stock with a neutral rating, highlights operational risks

On Thursday, Citi initiated coverage on South State Corporation (NYSE:SSB) with a Neutral rating and established a price target of $102.00. The new rating reflects a cautious outlook on the bank's operational risks following its pending deal with Independent Bank (NASDAQ:INDB) (NASDAQ:IBTX).

Citi acknowledges the historical performance of the legacy CenterState management team during past mergers, which appears to be supporting the current share price, anticipating a seamless deal timeline and robust operational future.

The analyst pointed out that the merger between legacy CenterState and South State, forming the current corporation, commands a valuation above its peers at 2.0 times the tangible book value (TBV). This premium valuation, according to the analyst, leaves limited margin for errors in integration and execution. The current market price is thought to be factoring in an optimal scenario for the merger's completion and the company's operational performance.

Looking ahead, Citi's analysis agrees with consensus expectations on South State's core operations and the anticipated financials post-merger, which is assumed to close by mid-first quarter of 2025. The bank's expansion into Texas and Denver is seen as a potential source of operational challenges post-deal, which might offer a more favorable entry point in terms of valuation.

Despite the potential for short-term turbulence, Citi considers South State to be a top-tier operator in the banking sector. The analysis suggests that there are rare moments within each economic cycle when the bank's valuation, compared to its peers, could present a compelling opportunity for investors. The current assessment, however, indicates a balanced risk/reward scenario for the coming quarters.

In other recent news, SouthState Corp announced its shareholders have approved a merger with Independent Bank Group (NASDAQ:IBTX), Inc., a move expected to close by the end of the first quarter of 2025. In the wake of this development, financial services firm Stephens raised its price target for SouthState from $88 to $101, maintaining an Equal Weight rating on the shares. Similarly, DA Davidson increased its price target for SouthState to $112, adjusting its earnings per share (EPS) estimates for 2024 from $6.40 to $6.67.

The company also reported strong Q2 results, with its operating earnings per share (EPS) of $1.79 surpassing the consensus estimate of $1.54 and total revenue standing at a solid $425 million. Despite a recent cyber incident costing SouthState $8 million, insurance is expected to cover $6 million of these expenses.

The company's capital ratios have improved, with a TCE ratio of 8.4% and CET1 of 12.1%. These developments showcase SouthState's focus on growth and market expansion, underpinned by strong loan quality and a cautious approach to commercial real estate lending.

InvestingPro Insights

South State Corporation's financial metrics and recent performance offer additional context to Citi's neutral stance. According to InvestingPro data, the company's P/E ratio stands at 15.28, suggesting a relatively moderate valuation compared to the broader market. This aligns with Citi's observation of the bank's premium valuation relative to peers.

InvestingPro Tips highlight that South State has raised its dividend for 12 consecutive years and maintained payments for 28 years, demonstrating a strong commitment to shareholder returns. This consistent dividend policy could be attractive to income-focused investors, especially given the current dividend yield of 2.24%.

The company's strong return over the last three months, with a price total return of 24.1%, indicates recent positive momentum. This performance may reflect market optimism about the pending merger with Independent Bank, as mentioned in the Citi analysis.

It's worth noting that InvestingPro offers 7 additional tips for South State Corporation, providing a more comprehensive analysis for investors considering the stock in light of the upcoming merger and potential operational challenges.

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