First Horizon Corporation (NYSE:FHN), a prominent player in the U.S. banking sector, has been navigating a complex financial landscape marked by intense deposit competition and evolving market dynamics. As the company approaches the end of 2024, it faces both challenges and opportunities that are shaping its strategic direction and financial performance.
Financial Performance
First Horizon reported solid financial results in the second quarter of 2024, with core earnings per share (EPS) of $0.36. The company's performance was characterized by well-managed expenses and stable credit quality, which helped offset pressures on net interest income (NII) and net interest margin (NIM).
Analysts project earnings per share for the fiscal year 2024 (FY1) at $1.53, with a slight increase to $1.60 for fiscal year 2025 (FY2). These estimates reflect the company's ability to maintain profitability despite challenging market conditions.
The bank's revenue outlook remains achievable, supported by strong fee income and fixed income performance. This diversification in revenue streams has proven crucial in compensating for the pressure on NII caused by the current interest rate environment and higher deposit costs.
Business Strategy
First Horizon's management has outlined a strategy focused on share buybacks and improving profitability by 2025. The company's active share repurchase program signals confidence in its underlying value and commitment to returning capital to shareholders.
The bank's approach to expense management has been particularly noteworthy. Analysts have highlighted the company's ability to control core expenses effectively, which has helped maintain profitability in the face of revenue pressures.
First Horizon's diversified business model has been a key strength, allowing the company to leverage various income streams to offset challenges in specific areas. This diversification has been particularly evident in the strong performance of fee income and fixed income activities, which have helped counterbalance NII pressures.
Market Position
First Horizon operates in a competitive banking landscape, particularly in the Southeastern United States. The company has faced increased deposit pricing competition, especially towards the end of the second quarter of 2024. This competitive pressure has contributed to the moderation of NII and NIM trends.
Despite these challenges, First Horizon maintains a solid market position, supported by its diversified offerings and strong regional presence. The bank's ability to adapt to changing market conditions and leverage its diverse business lines has been crucial in maintaining its competitive edge.
Challenges and Opportunities
One of the primary challenges facing First Horizon is the intense deposit competition in its core markets. This has led to higher deposit costs, putting pressure on the bank's NII and NIM. Additionally, the company has seen an increase in commercial real estate non-performing loans (CRE NPLs), although management has indicated that these loans have minimal loss content.
On the opportunity front, First Horizon's management has expressed optimism about the potential for broader bank mergers and acquisitions (M&A). This suggests that the company may be positioning itself to take advantage of consolidation opportunities in the banking sector.
The bank also stands to benefit from any potential Federal Reserve rate cuts in the second half of 2024. Such cuts could alleviate some of the pressure on NII and potentially boost lending activity.
Future Outlook
Looking ahead, analysts anticipate that First Horizon will focus on solidifying its Net Interest Income picture for 2025. The company is expected to continue its share buyback program, which may lead to a decline in the Common Equity Tier 1 (CET1) ratio in 2025 as capital is returned to shareholders.
The potential for Fed rate cuts in the latter half of 2024 could provide a tailwind for First Horizon, potentially easing some of the margin pressures the bank has been facing. Additionally, the company's strong capital position and effective expense management are expected to support its ability to navigate future challenges and capitalize on growth opportunities.
Bear Case
How might increased deposit pricing competition affect FHN's profitability?
The intensifying deposit pricing competition, particularly in the Southeastern United States, poses a significant challenge to First Horizon's profitability. As the bank competes to attract and retain deposits, it may be forced to offer higher interest rates on deposit products. This increase in deposit costs directly impacts the bank's net interest margin, which is the difference between the interest earned on loans and the interest paid on deposits.
The pressure on NIM can lead to reduced net interest income, a key component of the bank's revenue. If this trend continues or intensifies, it could erode First Horizon's profitability, potentially leading to lower earnings per share and reduced returns for shareholders. The bank may need to find ways to offset these higher costs, either through increased efficiency in other areas of operations or by growing non-interest income streams.
What risks does the declining CET1 ratio pose to FHN's financial stability?
The anticipated decline in First Horizon's Common Equity Tier 1 (CET1) ratio due to aggressive share buybacks raises concerns about the bank's financial stability. The CET1 ratio is a key measure of a bank's core equity capital compared to its risk-weighted assets, and it's an important indicator of the bank's ability to withstand financial stress.
A declining CET1 ratio could potentially limit First Horizon's flexibility in responding to economic downturns or unexpected financial shocks. It may also impact the bank's ability to pursue growth opportunities or make strategic investments. Additionally, if the ratio falls below regulatory requirements, the bank could face increased scrutiny from regulators and potential restrictions on capital distributions, including dividends and further share buybacks.
While share buybacks can be beneficial for shareholders in the short term by boosting earnings per share and potentially the stock price, an overly aggressive buyback program that significantly reduces capital buffers could expose the bank to increased risk in the long term.
Bull Case
How could potential Fed rate cuts in H2 2024 benefit FHN?
Potential Federal Reserve rate cuts in the second half of 2024 could provide significant benefits to First Horizon. Lower interest rates typically lead to reduced funding costs for banks, which could help alleviate some of the pressure on First Horizon's net interest margin that has been caused by intense deposit competition.
Rate cuts could also stimulate borrowing activity, potentially leading to increased loan demand. This could help First Horizon grow its loan portfolio and generate additional interest income. Moreover, lower rates often lead to increased refinancing activity, which could boost the bank's fee income from mortgage originations and other lending-related services.
Additionally, a more accommodative monetary policy environment could support economic growth, potentially improving the overall credit environment and reducing the risk of loan defaults. This could positively impact First Horizon's credit quality metrics and potentially lead to lower loan loss provisions, further supporting profitability.
What advantages does FHN's diversified business model offer in the current market?
First Horizon's diversified business model provides several advantages in the current market environment. The bank's ability to generate revenue from various sources, including traditional banking, fixed income trading, and other fee-based services, allows it to better weather challenges in any single area of its business.
For instance, while the bank has faced pressure on its net interest income due to the competitive deposit environment, its strong fee income and fixed income performance have helped offset these challenges. This diversification reduces the bank's reliance on net interest income, which is particularly valuable in a low-interest-rate environment or during periods of intense deposit competition.
The diversified model also allows First Horizon to capitalize on different market opportunities as they arise. For example, if market volatility increases, the bank's fixed income trading activities might see improved performance. Similarly, in a strong economy, the bank can benefit from increased lending activity while also capturing more fee-based business.
Furthermore, this diversification can make First Horizon more resilient to regulatory changes or economic shifts that might disproportionately affect one area of banking. It also provides the bank with multiple levers to pull in its efforts to improve profitability and manage risk, giving management more flexibility in strategic decision-making.
SWOT Analysis
Strengths:
- Diversified business model
- Strong fee income and fixed income performance
- Effective expense management
- Active share buyback program
- Solid credit quality
Weaknesses:
- Pressure on Net Interest Income (NII) and Net Interest Margin (NIM)
- Declining Common Equity Tier 1 (CET1) ratio due to aggressive buybacks
- Exposure to competitive deposit markets in the Southeast US
Opportunities:
- Potential for broader bank mergers and acquisitions (M&A)
- Asset repricing opportunities
- Possible Federal Reserve rate cuts in the second half of 2024
- Expansion of fee-based services
Threats:
- Intense deposit competition in the Southeastern United States
- Increase in commercial real estate non-performing loans
- Challenging interest rate environment
- Potential economic downturn affecting credit quality
Analysts Targets
- Barclays (LON:BARC): $23.00 (November 8th, 2024)
- RBC Capital Markets: $20.00 (October 17th, 2024)
- Barclays: $21.00 (October 17th, 2024)
- RBC Capital Markets: $19.00 (July 18th, 2024)
- Barclays: $19.00 (July 18th, 2024)
- RBC Capital Markets: $18.00 (May 20th, 2024)
This analysis is based on information available up to November 13, 2024, and reflects the most recent data and analyst reports provided in the context.
InvestingPro: Smarter Decisions, Better Returns
Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on FHN. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore FHN’s full potential at InvestingPro.
Should you invest in FHN right now? Consider this first:
Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if FHN is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.
To evaluate FHN further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if FHN appears on our undervalued or overvalued stock lists.
These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.