Over the past six months, Eastern Bank has been a great trade, beating the S&P 500 by 10.6%. Its stock price has climbed to $19.43, representing a healthy 21.1% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy Eastern Bank, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Eastern Bank Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons you should be careful with EBC and a stock we'd rather own.
1. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) represents the unit economics of a bank by measuring the profitability of its interest-bearing assets relative to its interest-bearing liabilities. It's a fundamental metric that investors use to assess lending premiums and returns.
Over the past two years, we can see that Eastern Bank’s net interest margin averaged a subpar 3.1%, meaning it must compensate for lower profitability through increased loan originations.
2. TBVPS Projections Show Stormy Skies Ahead
A bank’s tangible book value per share (TBVPS) increases when it generates higher net interest margins and keeps credit losses low, allowing it to compound shareholder value over time.
Over the next 12 months, Consensus estimates call for Eastern Bank’s TBVPS to shrink by 3.6% to $13.48, a sour projection.
3. Previous Growth Initiatives Haven’t Impressed
Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.
Over the last five years, Eastern Bank has averaged an ROE of 1.9%, uninspiring for a company operating in a sector where the average shakes out around 7.5%.
Final Judgment
Eastern Bank isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 1.1× forward P/B (or $19.43 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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